Credit opportunities funds are slowly moving from being niche to mainstream. He finds investor expectations from this space in terms of return profile are also becoming more mature. We are encouraged by the enhanced supply of paper in the mid-yield segment.This allows us to build a portfolio that closely mirrors the risk-reward offering that we intend to aim for in the credit space.

Some experts feel that the outlook for this segment is improving given that the borrowing cost for corporates is expected to come down with banks having excess liquidity post note recall.

Borrowing rates for companies have come down over the past couple of years, and the recent build-up in liquidity should help leveraged companies reduce debt. This may lead to rating upgrades, which could boost returns. Investors can consider moving partially to the credit opportunities space now that the duration play has taken a back seat. The spread in yield between AA or lower rated paper and AAA rated instruments is contracting, providing an opportunity for investors.

However, there are concerns. Although credit opportunities funds have not been affected by unfavourable yield movement, the risk of default in underlying companies remain high. There were seven credit rating downgrades last month but no major rating upgrades. So, investors should not chase yields without having safeguards in place. Avoid going for aggressive funds that chase higher yields in very low rated instruments.