Are days of high credit fund returns over?

Corporate credit funds, once considered safer substitutes to high-yielding bonds, fared their worst in about four years as volatility in NBFC debt and misaligned maturity profiles whittled down returns by 200-300 basis points.

In the past one year, credit funds have yielded 5.22% compared with 8.50-9.50% in normal circumstances, showed data from Value Research, an online mutual fund portal.

“Wherever fund houses have taken a hit by selling NBFC papers in losses, their average returns have come down significantly,” said Dhirendra Kumar, founder and CEO of Value Research. “Investors may continue to shy away from credit funds unless confidence is regained in NBFC debt securities.”

DSP Mutual Fund sold bonds of DHFL at a higher yield, triggering speculation that there could be ratings downgrades in the housing finance company. In the secondary market, DSP sold DHFL securities worth Rs 300 crore at yields of 11%, about 200 basis points higher than normal rates.

Top performing funds, including Aditya Birla and Franklin, yielded 7.7-9.3%: The laggards, which included DSP and BoI AXA, yielded -0.11 to -2.5% annual negative returns, data showed.

“Credit funds’ performance depends on the duration play and mark-to-market valuations,” said A Balasubramanian, CEO, Aditya Birla Sun Life AMC. “There are no credit losses although. Credit funds should regain momentum this year with calmness coming back to the debt market.”

Typically in credit funds, shorter maturity papers are the preferred bets. Some of the fund houses took long-term exposures, betting on the interest rate outlook. A sudden crisis in the NBFC space sent such bets haywire, with perpetual bond yields spiking.

Bond yields and prices move in opposite directions.

Perpetual bonds, perceived as riskier instruments, have no fixed maturity. But they have mostly a provision to allow investors an exit after 10 years.

“High networth individuals normally show interest in credit funds, but this is missing now,” said Vikram Dalal, MD, Synergee Capital. “Overloading of NBFC papers may have dented returns as the market battled a perceived crisis over the ability of those companies to repay.”

The differential between the benchmark bond yield and top-rated corporate bonds issued by private companies is about 100-110 basis points. The gap was about 70 basis points early September.

“Select corporate bond spreads widened further after the IL&FS default and ratings do not really matter in those cases,” said Ajay Manglunia, Executive Vice President at Edelweiss Finance. “Those investing in these corporate bonds will be incurring mark-to-market losses that determine fund returns.”


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