How To Measure The Performance Of Credit Risk Fund?

Credit risk funds are a type of debt-oriented mutual funds that invest in securities that have a lower credit rating, thus giving them the name ‘credit risk’ funds. Lower credit rating indicates lower credit quality as lower the rating, higher is the possibility of default.Through this article, we shall help you get a better insight into how experienced investors and industry experts measure the performance of a credit risk fund.

1. Review the scheme’s portfolio Credit risk funds in India are mandated to allocate at least 65% of their portfolio in debt instruments which are rated less than ‘AA’. The scheme’s portfolio should ideally not be concentrated or focused on instruments of companies having similar credit-ratings. This reduces the scope for risk diversification. The quality of papers that the fund manager has invested in has a direct impact on the performance of the credit risk fund.{2D743194-97C2-43F9-BC28-AEC370801ECD}
2. Compare with other investment options Investors looking to put their money on credit risk funds must understand that the risk should be worth the reward. Ideally, the selected credit risk fund must be able to beat the returns of safer debt investment avenues such as fixed deposits, short-duration funds, liquid funds , etc.
3. Take into account the performance of benchmarks and peers in the category As a rule of thumb, always compare the performance of mutual funds against that of peers and benchmark indices. Try to select a fund that consistently outperforms its peers. If the credit risk fund has managed to generate returns higher than the benchmark even during difficult market conditions, you can get a better understanding of how it would fare in the future.
4. Look at past returns Although past returns are just a historical observation and not a guaranteed indicator of future projection, looking at past returns gives the investors an insight into the performance of the fund. Past returns are an indicator of the credit risk fund’s return generating potential.
5. Analyze the fund manager’s performance Another important aspect that investors must examine before investing in a credit risk scheme is the fund manager’s background as well as his or her association with the scheme. The experience and expertise of the fund manager matter here as these funds need to be actively managed.

In Conclusion The risk-return tradeoff suggests that returns increase with a potential rise in risk. This makes investors perceive credit risk funds as high risk-high return investment opportunities. Therefore, it becomes extremely crucial to measure the performance of a credit risk mutual fund scheme before taking an investment decision.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.