Investing in debt mutual funds purely on the basis of return is a decision that investors often regret later. One of the most prominent risks in debt mutual fund is the credit risk. `Credit Quality Rating' provides an effective and efficient way to analyze this key risk.

Mutual Fund (MF) industry has been growing at a healthy rate over the last one year. The Asset Under Management (AUM) has grown substantially in FY10, after witnessing tough conditions in FY09 like liquidity constraints, low investor confidence, global uncertainty, etc. The average AUM is consistently above Rs 7 tn from August 2009 onwards, touching Rs 8 tn in May 2010 (see Chart 1).

The proportion of debt mutual funds in the total AUM has grown from around 60% to 70% over the last few years (see Chart 2). This indicates increased risk aversion among investors.

A mutual fund's performance is often evaluated by the returns it generates, as many investors like to choose the fund that has given the highest returns in the recent past. However, it is also equally important to look at the risk that the mutual fund has taken to generate the return. A fund taking higher risk may do very well when the economy is doing well. However, when things become difficult, these funds can fall much more than the average market. Thus, if the fund had invested in instrument of lower credit quality to get higher returns, it could just as well face problems in the period like we saw in the later half of FY09.

The Analyst Magazine, Debt Mutual Funds, Mutual Fund, MF, Asset Under Management, AUM, Liquidity Constraints, Low Investor Confidence, Global Uncertainty, Credit Quality Rating, CQR, Fund's Investment Strategy, Portfolio Credit Risk, Management Quality, Operational Policies, Asset Management Company, AMC.