Credit risk funds represent the biggest ignored opportunity among debt funds today. Here’s why:
- Notwithstanding slowdown in the economy, corporate balance sheets are stronger than ever before. A slowing economy puts pressure on margins – but doesn’t lead to heightened credit risk for industry leaders due to balance sheet strength.
- Credit risk funds typically hold around 60-70% of portfolio in AAA and AA papers and the balance 30-40% in single A papers, giving a good balance of quality and yield.
- The AAA and AA components are seeing healthy yields due to dynamism in the M&A space, green energy financing, inter-se promoter transactions and such like – which were not there earlier. These transactions can yield 70-100 bps higher than typical AAA yields – even of the same corporates, which boosts fund YTM considerably.
- In an environment where market will be struggling for carry sooner or later, credit risk funds offer investors an opportunity to earn higher accruals without taking on unnecessary risks. These indeed look more like credit opportunities rather than credit risk funds now!
RBI’s focus is shifting from inflation (which is comfortably low) to growth (which is uncomfortably slipping). Markets are expecting a 25 bps cut in December and potentially one more in February 2026. This could take the terminal rate down to either 5.25% or 5.00%.
Amit expects the 10 yr GSec yield to settle around 6.25% (+/- 10 bps) for perhaps the next 12 months.
Long bond (30 yr) yields which are upwards of 7% look very attractive if you assume a base case that India is settling into a lower inflation trajectory of around 4%, thus yielding 300 bps real return.
There is good opportunity to own 30 yr GSecs in duration funds rather than 10 yr GSecs, with a clear understanding that this is not a short term trade but a long term position.
NIMF’s Nivesh Lakshya makes good sense from the same perspective for individual investors.