VR Logo

Bullish on Lower-rated Papers

On account of the improving economic environment and forthcoming rate cuts, bond funds and opportunities funds are investing in lower-rated papers

Corporate bond funds and credit opportunities funds are chasing lower-rated papers to boost their returns. Most income funds have shifted a part of their investments from higher-rated papers to lower-rated ones in the last six to seven months.

The percentage of cash in the portfolios of these funds has also come down significantly in the recent past as funds have started chasing reasonably rated papers. These investments are made on hopes that a pick-up in the economic activity would enhance the credit profile of these companies. They may also offer a better yield if interest rates start falling in the coming months. In a falling interest rate regime, debt funds benefit from the coupon rate as well as the capital gains made on the price of the debt security.

These 12 funds manage money worth ₹18,235 crore in total, with four funds accounting for around 91.5 per cent of the total corpus. One of the funds, Kotak Corporate Bond Fund, was sitting on 26 per cent cash in June 2014. The cash component is down to mere 3 per cent now. Two fund houses - L&T and Baroda Pioneer - have launched a corporate bond fund and credit opportunities schemes, respectively, in January this year.

These funds invest in debt instruments of various companies depending on their credit ratings. Credit rating is the rating given to organisations to evaluate the credit worthiness of an issuer of debt instruments. It has an inverse relationship with interest rate or coupon on these instruments. A high credit rating indicates that the borrower has a low probability of defaulting on the debt; conversely, a low credit rating suggests a high probability of default.