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Credit Opportunities Fund

Credit Opportunities Funds work on the theory of accrual strategy. This strategy works on the principle of investing in a company of a comparatively lower credit rating when it shows a good scope of the ratings improvement in the future. This strategy creates the opportunity for generating a high yield, ensuring capital growth and proving to be a good investment.

A debt fund is often considered to be a prospective investment option, especially the ones that are rated below AA because they are accompanied by considerable risks.

Features of Credit Opportunities Funds

Below are the salient features of Credit Opportunities Funds:

Tax Benefits

A Credit Opportunities Fund has to pay Dividend Distribution Tax (DDT) at the rate of 28.84%, which is an additional expenditure to the company. Dividends are exempt from tax. Returns generated on investments made for up to 3 years are subject to Short Term Capital Gains Tax, as per the applicable tax slab of the investor. Long Term Capital Gains Tax is also applicable for all investors at the rate of 20%.

Long Term Investment

It is recommended that investors stay invested throughout the investment tenure because Credit opportunities Funds are low on liquidity. It becomes difficult to exit the fund, especially when a bond starts performing poorly or defaults.

Well informed purchase decision: It is essential to research thoroughly about the company before investing in Credit Opportunities Fund. Solely evaluating a fund based on its company rating is not sufficient. You also have to consider its performance in the recent past and its estimated growth potential to make a conscious investment.

How Does A Credit Opportunity Fund Work?

Credit opportunities funds can make returns either by accruing coupon payments that arise from the securities held by it, or alternatively by seeking benefit from a compression in yield spreads. The funds take on a credit risk by investing in lower-rated securities that can be upgraded in the future.

Credit opportunities funds have limited interest risk. Moreover, the average credit quality profile of the funds is appreciable as they keep the default probability of weighted average portfolio extremely low. Also, credit opportunities funds are very popular as they give 2-3% extra returns when compared to risk-free investments. Their risk-return trade-offs too can be quite high.

Things to Consider While Investing in Credit Opportunities Fund

Below are the points you should keep in mind while investing in Credit Opportunities Fund:

  • It takes an experienced investor or fund manager to research well, predict the market situation and make a conscious decision regarding a promising credit opportunities fund investment.
  • It is recommended that you invest in diversified mutual funds and in considerable quantities.
  • Specifically go for funds of larger size to diversify your portfolio and balance out the market risks.
  • Not just with respect to the fund size, the portfolio has to be diversified in terms of the industries and groups that it invests in.
  • Beginners and novice investors should preferably opt for a fund of lesser expense ratio.
  • Investments in credit opportunities fund has to be restricted between 10% and 25% of your fixed income portfolio.

Who Should Invest in Credit Opportunities Fund?

  • Being accrual funds, the investment decision is purely based on the estimation of its future growth, which cannot be guaranteed. Therefore, it requires a seasoned investor with enough knowledge of such investments to take a well informed decision.
  • It is for investors with a high risk appetite who are not looking for an investment that offers a reliable income.
  • It is also apt for investors who can be categorized under the highest tax slab and, therefore, pay Long Term Capital Gains Tax of 20% and not 30%.

Best Credit Risk Funds Lenders

Fund Name3 Year Returns (%)5 Year Returns (%)AUM (Rs. Crore)
Franklin India Credit Risk Fund8.719.957,116
UTI Credit Risk Fund8.619.875,321
Kotak Credit Risk Fund8.89.65,135
ICICI Prudential Credit Risk Fund8.369.5311,452
SBI Credit Risk Fund8.379.455,388

FAQs on Credit Opportunities Fund

What is a Credit Opportunities Fund?

A Credit Opportunities Fund invests in the fund of a company with a lower credit rating that shows the promise of improving in the future. This proves to generate a healthy return on investment. The most preferred ones are debt mutual funds that are rated as low as AA.

How does a Credit Fund work?

A Credit Opportunities Fund invests in the fund of a lower rated company that shows the scope of improving in the future. If and when the ratings improve, this accrual strategy generates a healthy yield.

What are Credit Risk Debt Funds?

Credit Risk Debt Funds invest in the fund of a company that has a lower credit rating, but shows the promise of increasing in the future. This ensures capital growth and generating healthy future returns. The most preferred ones are debt mutual funds with a low rating of AA.

How do debt funds make money?

Debt funds are classified under the mutual fund category which invests the investors’ money in bonds or different varieties of deposits. These investments generate capital growth to enable the investors to enjoy returns on these investments.

What are the different types of debt funds?

Below are the different types of debt mutual funds:

  • Money Market Funds or Liquid Funds
  • Medium Term Income Funds
  • Short Term Income Funds
  • Ultra Short Term Funds
  • Hybrid Funds
  • Close Ended Debt Funds
  • Corporate Bond Funds
  • Floating Rate Funds
  • Gilt Funds and Income Funds