As per SEBI Categorisation, credit risk funds invest 65% or more of the portfolio in AA or lower rated securities. So, you can look at a portfolio and tell if a fund is a credit risk fund or not. Right?
Good. Here’s a quick quiz for you. Below are the top holdings of 3 credit risk funds.
![](https://unovest.co/wp-content/uploads/2019/11/Franklin-India-Ultra-Short-Bond-Fund-Top-Portfolio-Holdings-Oct-2019.png)
![](https://unovest.co/wp-content/uploads/2019/11/HDFC-Credit-Risk-Debt-Fund-Portfolio-Top-HOldings-Oct-2019.png)
![](https://unovest.co/wp-content/uploads/2019/11/ICICI-Prudential-Credit-Risk-Fund-Portfolio-Top-Holdings-OCt-2019.png)
Now, the question. Which of the above portfolio conveys the best picture of a credit risk fund?
I don’t know about you, but to me, Fund 1 seems to fit the bill. The other 2 even have AAA rated instruments in their top holdings. I mean really!
I would rather go to a corporate bond fund or a short term fund to have AAA. Why choose a credit risk fund?
OK, so back to our 3 funds. Let me disclose their real names.
Fund 3 is ICICI Prudential Credit Risk Fund.
Fund 2 is HDFC Credit Risk Debt Fund.
Can you guess the name of Fund 1?
Unlikely! I did a trick on you! ๐
Fund 1 is the Franklin India Ultra Short Bond Fund – Super Institutional Plan. It is not part of the credit risk fund category. It is instead a part of the ultra short term category.
Read more about SEBI categorisation here
Moving on, look at the image below. It is a peer comparison of a few credit risk funds, including the 2 we used above.
![](https://unovest.co/wp-content/uploads/2019/11/Peer-comparison-Credit-Risk-Fund-Direct-Plans-26-Nov-2019.png)
The number to notice is the expense ratio, typically close to 1%. This is for direct plans. Add another 50 bps or more for regular plans. And what do they give for it? Anybody’s guess!
Now see this.
![](https://unovest.co/wp-content/uploads/2019/11/Franklin-India-Ultra-Short-Bond-Fund-details-26-Nov-2019.png)
The expense ratio of this fund is 0.41%, for a portfolio which plays on credit.
Credit risk funds are a joke, really!
- If I come to a credit risk fund, I come looking for the risk. Why choose a credit risk fund for safety aka AAA?
- Credit risk funds charge an expense ratio equal to equity funds, without commensurate effort. Forget the performance, even the portfolios don’t reflect risk.
- Franklin India UST, even though an ultra short bond fund, has more lower rated securities and hence higher credit risk than the so called, credit risk funds.
- Franklin India UST does it for me at a much lower cost. The fund is known for its credit calls including using structured products.
Between you and me: What is your take on credit risk funds?
Note: Nothing in this post should be considered as a recommendation. You should talk to your advisor if this is the right fit for you.
Disclosure: I am an investor in Franklin India UST Bond Fund.
Thanks Vipin for this information