UTI Credit Opportunities Fund - NEW FUND ON THE BLOCK

With bank deposits not providing enough returns to compensate for the high inflation, fixed-income investors may have to look to riskier debt to prop up their returns.

To capture this set of retail investors, UTI AMC is launching a debt fund for investors with higher risk appetite. UTI Credit Opportunities Fund is an income fund that plans to invest up to 50 per cent of the portfolio in debt securities with ratings of AA or lower.

With interest rates on a downward trajectory, lower rated debt may be chased for better returns.

Risky debt

There are a few schemes in income fund category which invest in risky debt. Funds such as Birla Sun Life Medium Term Plan, Templeton India Income Opportunities, Templeton India Corporate Bond Fund and UTI Dynamic Bond Fund are some of the funds with investments in AA/AA- rated securities. This theme has helped them to outperform their respective benchmarks.

UTI Credit Opportunities, on the other hand, plans to go one step further by investing a maximum 15 per cent of its securities in even riskier investments such as ‘A’ rated securities.

UTI plans to invest in credit instruments priced below their correct value, with potential for upgrades.

While the investment theme sounds interesting, given the active management involved in such strategy and the portfolio being exposed to credit and liquidity risks, a sound track record is necessary for investors to buy units in such funds.

UTI Dynamic Bond Fund, which mostly invests in securities of AA+ to AA- ratings, is already yielding better than benchmark returns. Even if one considers UTI Credit Opportunities, the holding period should be long to benefit from the said strategy.

Pros and Cons

The reason for exposure to such ‘A’ and ‘AA’ rated instruments is that the yields on such investments are high. For instance, the average yield on a three-year instrument with AA credit rating is around 9.5 per cent. The yields are higher in case of single ‘A’ rated instruments as the investors have to be compensated both for the credit risk and liquidity risk. UTI Credit Opportunities may adopt a buy-and hold strategy for these bonds to mitigate risk arising from illiquidity.

Around 80 per cent of the portfolio will be invested in liquid instruments such as money market instruments (certificates of deposits and commercial papers) and corporate debentures with higher credit ratings (AAA and AA) to take care of redemption needs. While liquidity risk can be addressed, there is still default risk and downgrade risk to some of these bets.

According to CRISIL, during the period 2001-2011, the cumulative default rate for a single ‘A’ instrument is 1.9 per cent by end of third year. This means that 1.9 per cent of ‘A’ issuers have defaulted by the end of third year, during this period.

In the scenario of a downgrade, the prices of securities will decline. A buy-and-hold strategy may reduce downgrade risk and liquidity risk for the fund, but not default risk. The fund also plans to invest in securitised debt which has relatively higher default risk for the same ratings.

Fund details

The fund carries exit load of 1.25 per cent if sold one year after the investment and 0.75 per cent prior to 18 months but after one year.

It is a retail focussed fund and the AMC plans to raised a minimum of Rs 20 crore through this issue with an option to retain oversubscription.

It being a retail investor focussed fund, the assets under management will be stable, thereby allowing the fund to stick to its investment mandate. The fund is managed by Mr Amandeep Chopra.

COMMENT NOW