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Overview
Credit Risk Funds are debt mutual funds that deliberately invest a meaningful portion of their portfolios in corporate bonds carrying lower credit ratings than the highest rating bands.
They seek additional yield by accepting greater credit risk than categories focused predominantly on highly rated debt.
That additional yield is not free return.
A downgrade, default, or deterioration in an issuer's financial condition can result in losses for investors.
Explained
A Credit Risk Fund is an open-ended debt scheme focused on lower-rated corporate bonds within the limits prescribed by the applicable category framework.
Unlike Corporate Bond Funds, which concentrate predominantly on higher-rated corporate debt, Credit Risk Funds can take substantially greater exposure to lower-rated corporate securities.
The strategy attempts to earn higher yields and potentially benefit when an issuer's credit quality improves.
Explained
The fund manager analyses corporate issuers and identifies bonds that offer higher yields in exchange for additional credit risk.
The investment team may study:
For example, a lower-rated company may offer a higher bond yield than a financially stronger issuer.
If the company successfully improves its finances, its bonds may rise in value as investors demand a smaller credit-risk premium.
If the company's finances deteriorate, the opposite can happen.
Suitability
Credit Risk Funds may suit investors who:
They are generally unsuitable for investors whose main objective is capital stability.
Advantages
Lower-rated bonds usually need to offer higher yields to compensate investors for taking additional credit risk.
If an issuer's financial position improves and its credit rating rises, its bonds may appreciate.
Fund managers and credit analysts examine issuers instead of requiring investors to assess individual corporate bonds themselves.
A fund can spread credit exposure across multiple companies. This can reduce dependence on one borrower, but it cannot eliminate the impact of defaults or broad credit stress.
Before you invest
An issuer may fail to pay interest or principal as promised. This can directly reduce the value of the fund's portfolio.
A bond does not need to default to create losses. A credit-rating downgrade can cause its market price to fall.
Lower-rated bonds may become difficult to sell during stressed market conditions. The price available in the market may also be substantially below the fund's previous valuation.
Check exposure to individual companies and corporate groups. A few large lower-rated positions can materially influence fund performance.
A high portfolio YTM may partly reflect elevated credit risk. Never compare Credit Risk Funds solely by choosing the highest YTM.
Credit risk is not the only risk. Portfolio duration and changing market yields can also affect returns.
Taxation
Credit Risk Funds predominantly invest in debt securities and can fall within the current definition of a Specified Mutual Fund when the Section 50AA conditions are met.
For relevant units acquired on or after April 1, 2023, gains on transfer, redemption, or maturity can be deemed short-term capital gains irrespective of holding period.
Such gains are generally taxed at the investor's applicable income-tax rate under prevailing provisions.
Step by step
Good to know
It is a debt mutual fund that deliberately takes meaningful exposure to lower-rated corporate bonds as part of its investment strategy.
Lower-rated borrowers generally need to pay higher yields to compensate investors for greater credit and liquidity risk.
Yes. Defaults, credit downgrades, liquidity problems, rising yields, or widening credit spreads can cause losses.
Not automatically. A high YTM may indicate that the portfolio is taking more credit risk.
Corporate Bond Funds focus predominantly on higher-rated corporate debt. Credit Risk Funds deliberately take greater exposure to lower-rated corporate securities.
They are generally not an obvious choice for money where capital stability and immediate access are the highest priorities.
Recap
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FUND
DSP Credit Risk Fund Direct Plan GrowthDebt Credit Risk₹60.86
0.08%
11.22%
16.82%
13.36%
Aditya Birla Sun Life Credit Risk Fund Direct Plan GrowthDebt Credit Risk₹28.14
0.1%12.82%
13.18%
10.9%
HSBC Credit Risk Fund Direct Plan GrowthDebt Credit Risk₹37.79
0.08%6.67%
11.79%
9.46%
Bank of India Credit Risk Fund Direct GrowthDebt Credit Risk₹14.89
0.02%17.93%
10.11%
27.8%
IDBI Credit Risk Fund. Direct Plan GrowthDebt Credit Risk₹17.55
0.01%7.09%
10.08%
3.83%
Invesco India Credit Risk Fund Direct GrowthDebt Credit Risk₹2351.89
0.14%8.11%
9.65%
8.42%
I
ICICI Prudential Credit Risk Fund Direct Plan GrowthDebt Credit Risk₹38.71
0.08%8.61%
9.16%
8.01%
Nippon India Credit Risk Fund Direct Plan Growth OptionDebt Credit Risk₹42.34
0.09%8.01%
8.95%
7.9%
Axis Credit Risk Fund Direct GrowthDebt Credit Risk₹26.44
0.08%8.64%
8.85%
7.69%
SBI Credit Risk Fund Direct Plan Daily Reinvestment Inc Dist cum Cap WdrlDebt Credit Risk₹17.2
0.1%8.45%
8.67%
7.75%
DSP Credit Risk Fund Direct Plan Payout of Income Dist cum Cap WdrlDebt Credit Risk₹12.76
0.08%11.23%
14.81%
11.96%
Aditya Birla Sun Life Credit Risk Fund Direct Plan Payout Inc Dist cum Cap WdrlDebt Credit Risk₹14.72
0.1%12.42%
11.52%
9.62%
HSBC Credit Risk Fund Direct Plan Reinvestment of Income Dis cum Cap wdrlDebt Credit Risk₹12.32
0.08%6.62%
11.36%
9.08%
Kotak Credit Risk Fund Direct GrowthDebt Credit Risk₹36.31
0.1%7.71%
8.63%
6.75%
HDFC Credit Risk Fund Direct Plan Growth OptionDebt Credit Risk₹28.35
0.1%7.51%
8.25%
7.14%
Invesco India Credit Risk Fund Direct Discretionary Payout of Income Dist cum Capital WtdrlDebt Credit Risk₹2369.45
0.14%8.11%
9.65%
8.42%
I
ICICI Prudential Credit Risk Fund Direct Plan Quarterly Reinvestment Inc Dist cum Cap WdrlDebt Credit Risk₹11.89
0.08%6.06%
8.2%
7.4%
Nippon India Credit Risk Fund Direct Plan Payout Inc Dist cum Cap WdrlDebt Credit Risk₹22.92
0.09%8.01%
8.95%
7.9%
Axis Credit Risk Fund Direct Weekly Pyt of Inc Dis cum Cap WdrlDebt Credit Risk₹10.37
0.08%8.63%
8.83%
7.68%
SBI Credit Risk Fund Direct Plan GrowthDebt Credit Risk₹54.22
0.1%8.45%
8.66%
7.75%
Showing 1–20 of 46
