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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.
Below are the salient features of Credit Opportunities Funds:
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%.
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.
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.
Below are the points you should keep in mind while investing in Credit Opportunities Fund:
| Fund Name | 3 Year Returns (%) | 5 Year Returns (%) | AUM (Rs. Crore) |
|---|---|---|---|
| Franklin India Credit Risk Fund | 8.71 | 9.95 | 7,116 |
| UTI Credit Risk Fund | 8.61 | 9.87 | 5,321 |
| Kotak Credit Risk Fund | 8.8 | 9.6 | 5,135 |
| ICICI Prudential Credit Risk Fund | 8.36 | 9.53 | 11,452 |
| SBI Credit Risk Fund | 8.37 | 9.45 | 5,388 |
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:
