What are Credit Opportunities funds?

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What are Credit Opportunities funds?
Opportunities funds as the name suggest are funds that do not concentrate their investment in a particular asset class or a theme, instead on the basis of the tapped opportunities across asset classes portfolio under the scheme is formed. Within the category, some of the funds may span their funds across a particular geography for avoiding risk per se currency and other geo-political and economic risks.

Also, under the category, which forms the part of the broader fixed income mutual funds category, new category of funds has come to the fore in the last few years that in respect of the average maturity period are more close to short term funds. Of the several funds floated by the fund houses in the category, minimum investment horizon for most of the funds ranges between 180 days to 2 years term.

Investment objective: By tracking opportunities across the credit spectrum, such funds generate returns for investor by investing in money market/ and debt instruments. To generate higher yield for the investors, credit opportunities funds often invest in financial instruments or securities with low credit ratings of AA and below i.e. non-AAA rated instruments. Lower credit rating imply higher risk exposure and correspondingly higher yield or returns.

And in comparison to the short term income funds category, the new category has outperformed across one to two year maturity term as per the CRISIL's study of such funds. The better performance of such funds is attributed to the higher spread in case of lower-rated securities in comparison to higher-rated securities. Implying, a better investment with a likely greater probability to generate higher returns.

Who should invest in credit opportunities fund?

Given the increased popularity of such funds, as underlined by increasing assets under management year-on-year. And, with exposure to government-securities, AAA-rated instruments and a pegged investment in low credit rated securities (AA and below), such funds have outperformed in comparison to short term income funds. So, returns from credit opportunities funds is based on the yields of the government securities and spreads between the securities with different rating.

Such income fund category is suggested for investors with medium risk profile and having a mid to long term investment view. Also one must be willing to lock a certain lump-sum amount at an attractive yield.


Story first published: Wednesday, March 5, 2014, 12:53 [IST]
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