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Credit risk funds are a type of debt mutual fund that primarily invest in lower-rated debt securities, offering potentially higher returns in exchange for increased credit risk. These funds can be an attractive option for investors Read more..with a higher risk appetite looking to diversify their portfolios while earning better yields compared to conventional debt instruments. Read less
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Name
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AUM
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1Y Returns
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|
|---|---|---|---|
ICICI Pru Credit Risk Fund (IDCW-Q) - Reinvestment Debt|Credit Risk Fund Buy |
₹6091.39 cr. | 9.64% | |
|
ICICI Pru Credit Risk Fund (G) Debt|Credit Risk Fund Buy |
₹6091.39 cr. | 9.64% | |
|
ICICI Pru Credit Risk Fund (IDCW-Q) Debt|Credit Risk Fund Buy |
₹6091.39 cr. | 9.64% | |
|
Aditya Birla SL Credit Risk Fund (IDCW) - Payout Debt|Credit Risk Fund Buy |
₹1004.46 cr. | 16.90% | |
|
Baroda BNP Paribas Credit Risk Fund-Reg (IDCW-M) - Reinvestment Debt|Credit Risk Fund Buy |
₹189.67 cr. | 9.25% | |
|
Aditya Birla SL Credit Risk Fund (G) Debt|Credit Risk Fund Buy |
₹1004.46 cr. | 16.96% | |
|
Nippon India Credit Risk Fund (IDCW-Q) - Payout Debt|Credit Risk Fund Buy |
₹1018.01 cr. | 9.91% | |
|
SBI Credit Risk Fund (IDCW) Debt|Credit Risk Fund Buy |
₹2235.76 cr. | 8.91% | |
|
Nippon India Credit Risk Fund (IDCW) - Payout Debt|Credit Risk Fund Buy |
₹1018.01 cr. | 9.91% | |
|
SBI Credit Risk Fund (G) Debt|Credit Risk Fund Buy |
₹2235.76 cr. | 8.91% |
A credit risk fund is a debt mutual fund that allocates at least 65% of its assets to corporate bonds with credit ratings below AA. These funds aim to capitalise on the potential appreciation of lower-rated securities while providing investors with higher interest income.
Credit risk arises due to the possibility of issuers defaulting on interest payments or principal repayments. To mitigate this, fund managers strategically balance the portfolio by incorporating a mix of lower and higher-rated securities.
Bajaj Broking provides investors with insights and guidance to make informed decisions when considering credit risk funds as part of their investment strategy.
Credit risk funds function by investing a substantial portion of their assets in lower-rated corporate debt securities. These securities typically offer higher interest rates to compensate for the associated risk. The key working principles of a credit risk fund include:
Due to lower credit ratings, these bonds offer greater interest rates compared to high-rated corporate or government bonds.
If an issuer's credit rating improves, the value of the bond may rise, benefiting the fund’s overall returns.
Experienced fund managers at broking firms assess creditworthiness, manage risks, and optimise fund performance through diversification and strategic asset allocation.
Interest rate changes and economic shifts impact the performance of credit risk funds, influencing investor returns.
While credit risk funds carry a higher risk of defaults compared to top-rated debt instruments, they offer an opportunity for better returns when managed effectively. Investors should carefully assess their risk tolerance and investment goals before considering these funds.
Compared to other debt funds, credit risk funds have the potential to generate higher returns. Since they invest in lower-rated securities that offer higher interest rates, they can deliver better yields over time.
As per SEBI guidelines, at least 65% of a Credit Risk Fund's portfolio must be invested in corporate debt securities rated AA or below. This allocation ensures that these funds maintain exposure to higher-yielding but riskier instruments.
Credit risk funds are actively managed by experienced fund managers who strategically select a mix of lower-rated and high-quality debt securities to balance risk and optimise returns.
These funds invest in a variety of corporate debt instruments across different industries, reducing the risk associated with the default of a single issuer. A well-diversified portfolio helps mitigate potential losses.
Credit risk funds enjoy tax benefits, especially for long-term investors. If held for more than three years, the gains are taxed at 20% with indexation benefits, making them tax-efficient compared to fixed deposits for high-income investors.
While these funds aim to offer higher returns, they carry risks related to changes in interest rates and liquidity. If a security in the portfolio gets downgraded, the fund's value may decline. Additionally, liquidity risk arises if the fund faces large redemptions and struggles to sell its holdings at favourable prices.
These funds primarily invest in lower-rated corporate debt securities, aiming for higher yields. They are suited for investors with a higher risk tolerance who seek better returns from the debt market.
Hybrid credit risk funds combine credit risk debt instruments with other fixed-income securities, such as government bonds or AAA-rated corporate bonds. This mix reduces risk while maintaining relatively higher returns.
These funds focus on lower-rated debt instruments with shorter maturities, typically between one to three years. They help investors mitigate interest rate risk while still benefiting from higher yields.
Long-duration credit risk funds invest in lower-rated securities with longer maturities, generally exceeding five years. These funds can be more volatile but may offer superior returns over an extended period.
These funds actively adjust their portfolio based on market conditions and credit rating movements. The fund manager has the flexibility to shift investments between lower-rated and high-quality debt instruments to optimise returns while managing risks.
Those who want to earn higher yields compared to conventional debt funds may find credit risk funds appealing.
Individuals who are familiar with market dynamics and are willing to take calculated risks for potentially better returns.
If you already have a well-diversified portfolio across equities, debt, and other asset classes, adding credit risk funds can provide an additional income source.
Since credit risk funds benefit from an improvement in credit ratings over time, investors with a longer investment horizon can maximise their returns.
For those in higher tax brackets, credit risk funds may offer tax efficiency through long-term capital gains tax benefits.
However, these funds may not be suitable for conservative investors or those looking for stable, low-risk returns. It is crucial to evaluate personal financial goals and risk tolerance before investing in credit risk funds.
Investing in credit risk funds is a straightforward process when done through a trusted platform like Bajaj Broking. Follow these steps to invest efficiently:
To invest in mutual funds, you need to have a demat and trading account. If you do not already have one, you can open an account with Bajaj Broking by completing the KYC (Know Your Customer) process online.
Before investing, it is important to evaluate different credit risk funds. Consider the following factors:
Past performance of the fund
Credit ratings of the securities in the portfolio
Fund manager’s track record
Expense ratio and management fees
Investment horizon and risk level
You can invest in credit risk funds through:
Lump Sum Investment: A one-time investment for those with a larger capital to deploy.
Systematic Investment Plan (SIP): Allows you to invest a fixed amount at regular intervals, helping to average out market fluctuations and mitigate risks.
Once you have selected a fund and investment mode, place your order through Bajaj Broking’s online platform. You can choose the payment mode, confirm the transaction, and set up auto-debit for SIPs if required.
After investing, it is crucial to track fund performance periodically. Monitor:
NAV (Net Asset Value) changes
Any credit rating upgrades or downgrades
Interest rate movements and their impact on returns
Rebalancing your portfolio periodically ensures that it aligns with your financial goals and market conditions.
Credit risk funds have the potential to deliver higher returns compared to traditional debt funds. This is because they invest in lower-rated debt securities, which offer higher interest rates to compensate for the increased risk. If the credit rating of these securities improves over time, investors can benefit from capital appreciation as well.
Since credit risk funds invest in lower-rated corporate bonds, they tend to offer higher yields than other fixed-income options. This makes them an attractive choice for investors looking to generate regular income while taking on a measured level of risk.
Investing in credit risk funds provides exposure to a diverse portfolio of corporate bonds from various sectors and issuers. This diversification helps spread the risk and can reduce the impact of defaults or downgrades in any single security.
Credit risk funds are managed by experienced fund managers who have expertise in analysing credit quality, economic conditions, and market trends. Their ability to actively manage the fund and reallocate assets based on credit rating changes can optimise returns for investors.
These funds can serve as a hedge against inflation when their returns exceed inflation rates. This is particularly beneficial for investors seeking a balance between risk and potential reward in a high-inflation environment.
Credit risk funds offer flexible investment durations, allowing investors to choose between short- or long-term strategies based on their financial goals. This makes them suitable for individuals with varying investment timelines and liquidity needs.
Retail investors can gain exposure to corporate and high-yield bonds through credit risk funds, which may otherwise not be easily available to them. This accessibility allows a broader range of investors to participate in potentially higher-yielding fixed-income securities.
Credit risk funds invest in securities that may have lower liquidity, meaning they might not be easily sold in the market.
If multiple large investors redeem their units simultaneously, the fund may face challenges in liquidating assets without impacting returns.
Downgraded securities become harder to sell, which can affect the overall performance of the fund.
Since these funds invest in lower-rated bonds, there is a higher risk of default by issuers.
If the credit rating of a security falls further, its market value drops, leading to potential losses for investors.
A default by one or more issuers in the fund's portfolio can significantly impact the fund’s Net Asset Value (NAV).
Credit risk funds, like other debt funds, are affected by interest rate fluctuations.
If interest rates rise, the value of existing bonds with lower yields decreases, which can negatively impact returns.
Investors should be mindful of economic cycles and monetary policies before investing in such funds.
Economic downturns or financial instability can affect corporate bond markets, leading to volatility in credit risk fund performance.
Sector-specific risks can also play a role if a fund is heavily invested in industries facing financial difficulties.
Credit risk mutual funds are taxed like debt funds, meaning short-term capital gains (held for less than three years) are taxed as per the investor’s income tax slab.
Long-term capital gains (held for three years or more) are taxed at 20% with an indexation benefit.
Dividend payouts from these funds are added to an investor’s taxable income and taxed accordingly.
Credit risk funds typically have higher expense ratios compared to other debt funds due to active fund management and credit risk assessment.
Investors should consider the expense ratio while choosing a fund, as higher costs can eat into overall returns.
Credit risk funds invest in lower-rated debt securities, which come with higher risks. To mitigate potential losses, investors should opt for funds that are well-diversified across different issuers and sectors. A well-diversified portfolio helps in reducing the impact of defaults or downgrades on overall returns.
The expense ratio is a critical factor as it directly affects the returns of the fund. A high expense ratio can erode gains over time. It is advisable to compare different credit risk funds and choose one with a competitive expense ratio that aligns with your investment goals.
Credit risk funds require active management to balance risk and return effectively. It is essential to research the fund manager’s track record, experience, and past performance in managing credit risk portfolios. An experienced fund manager can make a significant difference in optimising returns while minimising risks.
Credit risk funds are not suitable for risk-averse investors as they carry a higher probability of defaults compared to other debt funds. Investors should assess their own risk tolerance before investing. Those comfortable with moderate to high-risk investments can consider allocating a portion of their portfolio to credit risk funds.
These funds are better suited for investors with a medium to long-term investment horizon. Credit risk funds may experience short-term volatility, and holding them for a longer period increases the chances of earning stable returns while benefiting from potential credit upgrades.
Interest rates and overall market conditions play a significant role in the performance of credit risk funds. Investors should monitor economic trends, inflation rates, and monetary policies to determine if it is the right time to invest in these funds.
A credit risk fund with a large corpus and significant AUM indicates better stability and risk mitigation. Larger funds often have diversified holdings, which help reduce the impact of defaults on the overall portfolio.
If an investor sells their credit risk fund units within three years of investment, the gains are considered short-term capital gains. These gains are taxed as per the investor’s applicable income tax slab rate.
For investments held for more than three years, the gains qualify as long-term capital gains. LTCG on credit risk funds is taxed at 20% with the benefit of indexation, which helps in adjusting the purchase price for inflation, thereby reducing the taxable gains.
Dividends received from credit risk funds are added to the investor’s taxable income and taxed as per their respective income tax slab. Additionally, if the dividend amount exceeds ₹5,000 in a financial year, a 10% Tax Deducted at Source (TDS) is applicable.
Investors in the highest tax slab (30%) may find credit risk funds more tax-efficient compared to traditional fixed-income instruments, especially when holding the investment for the long term to take advantage of indexation benefits.
The indexation benefit allows investors to adjust the purchase price of their investments based on inflation. This significantly reduces the taxable capital gains and lowers the overall tax liability.
Below is a simplified tax table for reference:
Type of Capital Gain | Holding Period | Tax Rate |
Short-Term Capital Gains | Less than 3 years | As per income tax slab |
Long-Term Capital Gains | 3 years or more | 20% with indexation benefit |
Understanding these taxation aspects can help investors plan their investments in credit risk funds efficiently and maximise post-tax returns.
Credit risk funds are a category of debt mutual funds that invest primarily in lower-rated corporate bonds to generate higher yields. These funds carry a higher level of risk but can offer attractive returns compared to traditional debt funds. Below is an overview of the top credit risk funds in India based on Assets Under Management (AUM), expense ratios, yields, and historical performance.
Top Credit Risk Mutual Funds
Fund Name | AUM (₹ Cr) | Expense Ratio | Average YTM | Category YTM | 3-Year CAGR | 5-Year CAGR |
HDFC Credit Risk Debt Fund | 7,344.44 | 1.00% | 8.49% | 8.18% | 6.97% | 7.80% |
ICICI Pru Credit Risk Fund | 6,287.09 | 0.76% | 8.56% | 8.18% | 7.74% | 8.01% |
SBI Credit Risk Fund | 2,278.20 | 0.89% | 8.61% | 8.18% | 7.67% | 7.68% |
Nippon India Credit Risk Fund | 980.94 | 0.69% | 8.97% | 8.18% | 7.56% | 6.12% |
Aditya Birla SL Credit Risk Fund | 933.02 | 0.67% | 8.26% | 8.18% | 9.75% | 9.21% |
This fund holds the highest AUM among the listed funds, standing at ₹7,344.44 crore. With an expense ratio of 1.00%, it is the most expensive fund in terms of costs. It delivers an average YTM of 8.49%, which is slightly above the category average of 8.18%. The 3-year CAGR stands at 6.97%, ranking it fifth in this metric, while the 5-year CAGR of 7.80% places it fourth among its peers.
With an AUM of ₹6,287.09 crore, this fund has an expense ratio of 0.76%. It offers an average YTM of 8.56%, exceeding the category YTM of 8.18%. Over the past 3 years, the fund has delivered a CAGR of 7.74%, ranking third, while its 5-year CAGR of 8.01% also places it third in the list.
The SBI Credit Risk Fund manages an AUM of ₹2,278.20 crore with an expense ratio of 0.89%. It offers an average YTM of 8.61%, which is above the category YTM of 8.18%. Its 3-year CAGR of 7.67% ranks fourth, while its 5-year CAGR of 7.68% ranks fifth in the list.
With an AUM of ₹980.94 crore, this fund has the highest average YTM at 8.97%, significantly above the category YTM of 8.18%. It has an expense ratio of 0.69%. However, despite its high yield, the fund has a 3-year CAGR of 7.56% (ranking last) and a 5-year CAGR of 6.12%, which is the lowest in the category.
This fund has the lowest AUM at ₹933.02 crore but also has the lowest expense ratio of 0.67%. It offers an average YTM of 8.26%, slightly above the category average of 8.18%. The fund outperforms in terms of returns, boasting a 3-year CAGR of 9.75% and a 5-year CAGR of 9.21%, making it the top performer in both timeframes.
Credit Risk Funds offer investors the opportunity to earn higher returns by investing in lower-rated corporate bonds. While these funds typically provide better yields compared to traditional debt funds, they also carry higher credit risk, making them suitable for investors with a moderate to high-risk appetite. Before investing, it is essential to assess factors like the fund’s portfolio quality, expense ratio, historical performance, and prevailing market conditions.
Given their potential for attractive returns, Credit Risk Funds can be a strategic addition to a well-diversified portfolio. However, investors should conduct thorough research or consult a trusted financial advisor, such as Bajaj Broking, before making any investment decisions.
No Data Found
Credit Risk Funds are not suitable for investors with a low-risk appetite. They invest in lower-rated securities, which carry a higher risk of default. Investors should have a moderate to high-risk tolerance before considering these funds.
Yes, Credit Risk Funds are considered risky. They predominantly invest in lower-rated debt securities, which have a higher probability of default. This increased credit risk can lead to potential losses for investors.
Credit Risk Funds are most suitable for investors with a moderate to high-risk tolerance, seeking higher returns from their debt investments, and having an investment horizon of at least 3 to 5 years. These investors should be comfortable with potential fluctuations in the fund's value.
An example of a Credit Risk Fund is the HDFC Credit Risk Debt Fund, which invests primarily in lower-rated corporate bonds to achieve higher returns. Investors can explore such funds through platforms like Bajaj Finserv Asset Management.
Investing in Credit Risk Funds can be beneficial for those seeking higher returns and willing to accept higher risk. However, they are not suitable for conservative investors. It's essential to assess your risk tolerance and investment horizon before investing.
The expected returns of Credit Risk Funds are generally higher than traditional debt funds due to the additional credit risk undertaken. However, actual returns can vary based on market conditions and the performance of the underlying securities.
Investing in Credit Risk Funds involves credit risk, where the issuer may default on payments, and liquidity risk, where the securities may not be easily sellable without significant price concessions. Interest rate fluctuations can also impact the fund's performance.
Yes, returns from Credit Risk Funds are taxable. As per the latest tax regulations effective from April 1, 2023, both short-term and long-term capital gains from these funds are taxed according to the investor's income tax slab rate. Dividends are also taxable in the hands of the investor.
The amount you should invest in Credit Risk Funds depends on your financial goals, risk appetite, and overall asset allocation. These funds are suited for investors willing to take on higher risk for potentially better returns. A well-diversified portfolio should limit exposure to Credit Risk Funds based on risk tolerance.
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