How safe are credit-risk funds? | Value Research Dhirendra Kumar talks about gilt and credit-risk funds and explains why they are not comparable to fixed deposits
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How safe are credit-risk funds?

Dhirendra Kumar talks about gilt and credit-risk funds and explains why they are not comparable to fixed deposits

How safe are credit-risk funds?

How safe are credit-risk and gilt funds right now? Can they be preferred over fixed deposits?
- Rajan

No, if you are actually drawing a comparison between credit-risk and gilt funds and fixed deposits (FDs), then none of them can be compared with fixed deposits. All of them come with their individual configuration or a component of risk and return of a different kind. For example, gilt funds have no credit risk but they are exposed to the interest rate risk. So, when the rates go up, they will go down and that, too, quite dramatically because gilts are also available with longer duration. We have 10-, 15- or even 20-year the Government of India bond. If interest rates go up by one per cent, these funds can actually collapse by 10-20 per cent.

So, nothing is risk-free and it is important to understand how you actually prepare yourself to take the risk in a measured way. If you really want to a draw a comparison with FDs, then limit yourself to ultra-short-duration or liquid funds, as these funds will get you a return of fixed deposit kind, with very small likelihood of money going down in value. Also, these funds will be more tax-efficient and provide superior liquidity.

On the other hand, people assume from the name that there is a risk attached to credit-risk funds and so they are little scary. But these funds are just lending the money to companies to enhance your return and the fund manager does the job of reducing your risk or evaluating credit in a manner that the fund remains least exposed to the risk. Having said that, the analysis cannot always be correct.

But the benefit of mutual funds definitely plays a role here. Consider this - if you put all your money in a company deposit and if the company gets stuck, then all your money goes down the drain. But if you invest in a mutual fund, then a small part of your money disappears and being a going concern you can well realize it. Also, maybe here there would be superior realizability over a period of time. Having said that, when it comes to a strict comparison with FD, stick to ultra-short-duration funds.

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