Is SIP return in credit risk fund not able to fight inflation? Calculation – What did investors get after 5 years

SIP in Credit Risk Funds :Credit risk funds are also a type of debt mutual funds, which have the possibility of getting higher returns. However, there is some risk in them as well. Credit risk funds select such securities whose current rating is low, but the rating is expected to improve in the future. Improvement in the rating in the future has a positive effect on them and the return increases. Therefore, investors invest in this category for higher returns by taking a little risk. These are known to give more interest than FDs. So, if you do SIP in Credit Risk Funds, then in the long term, these can give high returns against inflation.

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What are credit risk funds?

These mutual funds (Debt Mutual Funds) invest in bonds that are below high grade rating. That is, they invest in debt securities with low credit quality. These funds have higher risk because they invest in low quality instruments. However, bonds with low ratings can give high returns.

Fund managers of credit risk funds also select securities whose ratings are expected to increase in the future. This can have a positive impact on the fund’s NAV. Credit risk is one of the primary risks of investing in debt funds. It is the risk of the security issuer defaulting on repayment of principal and/or interest.

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These schemes gave high returns in 5 years (lump sum)

Bank of India Credit Risk Fund: 24.56% p.a.
DSP Credit Risk Fund: 10.26% p.a.
Baroda BNP Paribas Credit Risk: 9.25% p.a.
ABSL Credit Risk Fund: 8.04% p.a.
Invesco India Credit Risk Fund: 7.84%

(Source: Value Research)

Calculation of 5 Year SIP

Bank of India Credit Risk Fund

Monthly SIP: Rs 5,000
Duration : 5 years
Total investment in 5 years: Rs 4 lakh
Value of SIP after 5 years: Rs 6,78,350
Annualized return in 5 years: 17%

DSP Credit Risk Fund

Monthly SIP: Rs 5,000
Duration : 5 years
Total investment in 5 years: Rs 4 lakh
Value of SIP after 5 years: Rs 5,39,277
Annualized return in 5 years: 9.55%

Baroda BNP Paribas Credit Risk

Monthly SIP: Rs 5,000
Duration : 5 years
Total investment in 5 years: Rs 4 lakh
Value of SIP after 5 years: Rs 5,29,573
Annualized return in 5 years: 9%

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Is inflation being defeated or not?

If we look at the first three schemes, the annualized return of SIP in 5 years has been 17%, 9.55% and 9%. This is much better than the inflation rate of 5%. That is, in the long term, SIPs made in many credit risk fund schemes are giving you better returns against inflation. 5-year SIPs on these schemes are giving 8% to 17% annual return. If we add the benefit of compounding, then this is proving to be an option to beat inflation.

Debt funds or 5-year FD

FD (Fixed Deposit) is a safe and popular investment option. In this, returns are given according to the pre-determined interest. While there can be fluctuations in debt schemes, this is free from market fluctuations. Currently, most banks are giving around 6.50 percent to 7.25 percent interest for annual FD. Senior citizens get 50 basis points more interest. On the other hand, there are chances of getting high returns in credit risk funds, but returns are not guaranteed. However, debt funds are a better option in terms of liquidity.