Credit Risk MFs: Is The Worst Over?

The storm of defaults in debt funds that happened—since the collapse of IL&FS in September 2018 till the Yes Bank additional tier 1 perpetual bonds write-off in March 2020—was the worst in the history of India’s bond market. While almost all debt mutual fund categories bore the brunt of defaults, the impact was highest in credit risk funds, as this category has the highest exposure to credit risk. Subsequently, there was a liquidity crisis in March-April 2020 due to uncertainties in the initial phase of the pandemic, which further shook the confidence of investors. The once flourishing fund category of credit risk, which was popular prior to the spate of defaults, now has assets under management (AUM) of only Rs 26,000 crore, as of July 2022. This is against the debt funds AUM of Rs 12.5 lakh crore as on the end of July 2020 and an average of Rs 13.3 lakh crore as...