Credit Risk Funds

Credit risk funds are a type of debt funds that invest at least 65% of their money to those not-so-highly rated companies. The borrowers pay higher interest charges to compensate for their lower credit rating, leading to higher risk due to the increased possibility of default for the lender. Credit risk is generally higher with low-quality securities, and thus, most conservative investors prefer mutual funds that only invest in high-credit quality debt securities. However, Credit Risk Funds invest in low-credit quality securities. In this article, we will be discussing Credit Risk Funds highlighting the essential points you need to know before investing.

Features of Credit Risk Funds

Credit Risk Funds are ideal for those investors who have an investment horizon of at least 3-5 years.
These funds can offer tax efficiency to investors over the long run especially in the highest tax slab since their slab rates are 30%, and long-term capital gains (LTCG) are taxed at 20% that too after indexation benefits.
These funds deal with high credit risks.
These funds also have a high probability of incurring a loss in the short term.

Credit Risk Mutual Funds

Credit Risk Mutual Funds invest in bonds that lie below the highest grade rating. The higher the rating, the lower is the possibility of default. However, lower-rated bonds offer higher interest rates, and therefore, higher returns. These funds are suitable for investors who want to invest their money for a longer duration and prefer less risky assets to invest in compared to equity funds.

Top Performing Credit Risk Funds

Top-performing Credit Risk Funds in India are:

Frequently Asked Questions (FAQs)

1. What are Credit Risk Funds?

Credit risk funds are a type of debt funds that lend at least 65% of their money to low-rated companies. The borrowers pay higher interest charges to compensate for their lower credit rating, leading to higher risk due to the increased possibility of default for the lender.

2. Should I invest in Credit Risk Funds?

Credit Risk Mutual Funds are suitable for investors who want to invest their money for a longer duration and prefer less risky assets to invest in compared to equity funds. So, you can invest in these funds per your risk profile and investment duration.

3. Is a Credit fund a debt fund?

Yes, Credit risk funds are a type of debt funds that invest at least 65% of their assets in debt securities of companies with low credit ratings. Credit risk generally holds a higher portion in low-quality securities, and thus, most conservative investors prefer mutual funds which only invest in high-credit quality debt securities.

4. What are Credit Risk Funds suited for?

Credit Risk Mutual Funds are most suitable for those who want to invest their money for a longer duration and want to invest for higher returns by taking higher risks. These mutual funds are for moderate-long term investment, and the investor must choose these funds according to the duration of the investment. As an investor, you must also look into liquidity-related risks associated with these funds.