It’s a classic higher-return higher-risk game. Or rather, that’s what it should be. Credit opportunities (crop) funds are intrinsically designed for risk-taking investors since they are supposed to invest in high-return, low-rated paper. Though frankly, in India, none of them are true to their character and are reluctant to take risks - either on the credit side or liquidity aspect.
In the more developed debt markets in the West, such funds have the ability to change the allocation among investment grade and non-investment grade paper to take advantage of market dynamics. The fund’s assets are generally not required to meet any minimum quality rating although they play it safe by putting some parameters such as not more than 50 per cent of the of net assets in below investment grade securities (or the unrated equivalent). Back home, such funds have been around for just a few years, the oldest being DWS Cash Opportunities which was launched in June 2007. The latest entrant being such a scheme from Kotak Mutual Fund launched in April 2010. Yet, such funds have not really gained in popularity in India. The average assets under management currently are around Rs 5,397.55 crore. With Rs 4,180.78 crore under management, Templeton India Income Opportunities fund stands heads and shoulders above the rest, cornering more than 77 per cent of the total assets of all such funds.
They really should not be called credit opportunity funds because they have a play-it-safe mentality. None of them take very high risks and tend not to go below A-rated paper, the most daring probably stretching it to AA-. When we looked at the portfolios of all the seven funds to check out the exposure to instruments that are rated AA or below, the range is between 1.45 per cent and 52.75 per cent. Kotak Credit Opportunities and ICICI Prudential Regular Savings top the list with allocation to such instruments standing at 52.75 per cent and 38.26 per cent, respectively.
On the other end of the spectrum, we have Religare Credit Opportunities playing it extremely safe with an exposure of just 1.45 per cent, respectively, to instruments rated AA or below. Though in all fairness, Religare Credit Opportunities did take a bit more risk in March 2011 when more than 17 per cent of its portfolio was in such securities.
If we move on from the credit risk, these funds also have the option to consider liquidity risk, though logically their focus should be on the former. Where liquidity is concerned, these funds have the option of moving across the maturity spectrum. In reality, you don’t find huge swings. Currently, the safest of the lot is Religare Credit Opportunities Fund where the average maturity is 0.15 years. DWS Cash Opportunities follows closely behind with an average maturity of 0.23 years and 9.86 per cent exposure to paper rated below AA. Both funds are not consistent outperformers.
On the performance parameter, some of these funds have put in good numbers (see The returns of crop funds). Birla Sun Life Short Term Opportunities Ret leads the pack in terms of returns. Templeton Income India Opportunities Fund, the largest amongst all these funds, is also a pretty good performer. Not only does it beat its category average, but even compared to other crop funds is a decent offering.