This debt fund more than doubled in value in one year! Here’s what it bet on

The Indian capital market touched record highs last year and interest rates hit a bottom, thereby pushing up returns of debt funds. But the turn of the policy rate cycle has pulled the returns down.

However, one category of funds that has been an outlier is credit risk debt funds.

Credit risk funds mainly invest in bonds which are not among the highest rated and carry the risk of default. As a result, these funds are among the riskiest. At the same time, the bondholders are compensated for the additional risk with a higher return potential with better rates of interest than the highest rated bonds.

The median return of the fund category was around 5%, similar to fixed deposit rates offered by banks.

One fund that stood out of the crowd, however, is Bank of India’s credit risk fund. The fund has a low asset base with AUM of just around Rs 166 crore. It churned out a staggering 145.1% returns over the last one year.

This fund was also the top performer in the category with annualised returns of over 13% over a three-year period. But it has been a rank underperformer over a 5-year period. This shows it has generated robust returns over the short to medium term but one may think twice before betting on it with a long-term investment horizon.

To be sure, the fund had plunged almost 50% in April 2020 when the fund house wrote down various debt securities because of a series of defaults by companies in which it had invested. Most notably, it had written off its entire exposure to infrastructure financier IL&FS in 2018. The spectacular gains this year is because it has managed to recover some money from a couple of companies such as Sintex BAPL that it had earlier written off.

This fund has a fairly concentrated portfolio with just over a dozen securities as against an average of around 30 for the category.

These include debentures of Tata Motors Finance, Tata Motors, Tata Power, Godrej Industries and Manappuram Finance, bonds of SAIL and non-convertible debentures of Vedanta, Piramal Capital & Housing Finance, NABARD and Manappuram Finance.

Last month, it added two new securities: 9% SAIL bonds due 2024 and 5.27% NABARD NCDs due 2024.

If we look at securities it was overweight on vis a vis the peers, the fund placed more conviction on AA rated bonds. It was underweight on both AAA and A and below rated securities compared to the category average.