With fixed income options like bank FDs generating lackluster returns in a low interest rate environment, it is essential to look out for fixed income instruments that can deliver higher yields. This quest for additional return potential has led many investors to explore credit opportunities funds.
This article takes you through everything you need about credit opportunities funds in India.
What are credit opportunities funds?
Credit opportunities funds are a type of debt fund that primarily invests in lower-rated corporate bonds and other debt instruments. These funds aim to generate higher returns by taking calculated credit risks. They offer diversification in your investment portfolio by including higher yield but slightly riskier debt securities.
Advantages of credit opportunities funds
Higher potential returns: Credit opportunities funds typically offer the potential for high returns compared to traditional debt funds. This can be especially appealing to investors who are looking for higher investment returns.
Diversification: These funds invest in various debt mutual funds, including lower-rated bonds, which can help diversify your portfolio. This helps to reduce the overall risk of your investments.
Attractive in a low-interest-rate environment: Credit opportunities funds can be a great option when interest rates are low. They allow you to earn more than traditional fixed-income options potentially in such an environment.
Professional management: Fund managers of credit opportunities funds have the expertise to analyse credit risk and select suitable securities. This helps navigate the complexities of the debt market.
Liquidity: Most credit opportunities funds offer reasonable liquidity, making it easy to buy and sell units as needed.
Disadvantages of credit opportunities funds
Higher risk: The primary disadvantage of credit opportunities funds is the increased level of risk. Since they invest in lower-rated bonds, there is a higher likelihood of defaults or credit downgrades, which can impact the fund’s returns.
Market volatility: Debt mutual funds can be sensitive to changes in interest rates and market conditions, potentially affecting the value of your investment.
Credit risk: The performance of credit opportunities funds is heavily dependent on the credit quality of the underlying securities. A downgrade or default by an issuer can lead to losses.
Lack of guaranteed returns: Unlike traditional fixed deposits, credit opportunities funds may not offer guaranteed returns. Your returns can vary based on the market and economic conditions.
Tax implications of credit opportunities funds
While dividends are tax-exempt, returns earned on investments for up to 3 years are subject to short term capital gains tax, according to the investor’s applicable tax slab. Long term capital gains tax at a rate of 20% applies to all investors as well.
To wrap up
Credit opportunities funds offer an alternative way to invest in the fixed-income market while potentially benefiting from higher returns and professional management. However, it’s essential to know the higher credit and interest rate risks associated with these funds. Ensure that your investment choices align with your financial objectives and risk appetite.
