Credit Risk Funds: Features, Benefits, & Taxation

Credit risk funds are a type of debt fund that invest the majority of the assets in low-credit quality debt instruments.

Wondering why? 

Debt securities with low-rating may carry a higher risk. But these funds may also generate a superior yield than safer debt funds. 

Fund managers often invest in securities that they think have the potential of getting a credit boost. In the long run, these funds could bring higher returns than your expectations.

Interested to explore? Let’s find out more about Credit risk funds.

How Do Credit Risk Funds Work?

Debt funds come across two primary risks: Credit risk and Interest rate risk.

Credit risk is when the issuer may fail to repay your principal investment and returns. To avoid it, underlying bonds are given a rating based on factors such as: credit quality and the financial performance of a company.

Bonds below the rating AA are considered low-rating, high-risk bonds. 

Safe investors often avoid such bonds to eliminate credit risk.

However, low-rated bonds are not always bad. These bonds have the potential to outperform and boost their credit ratings.

In credit risk funds, fund managers allocate at least 65% of total assets into securities with AA or lower ratings.

Though there is a risk, there is also a possibility of better returns.

These bonds may get a credit boost based on their performance, which also amplifies the NAV. In a longer investment horizon, you may end up getting a higher yield.

Top 3 Advantages of Investing In Credit Risk Funds

1. Potential Of Superior Returns

These funds tend to deliver superior returns because of the risk involved. Investors looking to generate income among debt securities can consider these funds. 

2. Portfolio Diversification

Credit risk funds are a great way to diversify your portfolio. Swadanusar risk on your profile brings higher returns. Explore these funds if your portfolio has some space to take moderate risk.

3. Professional Management

These funds are not easy to manage on your own. Fund managers utilize their expertise to select the right debt funds to invest in. The underlying bonds may crawl up to the higher credit rating, rewarding you with more yield. 

Things To Consider Before Investing In

1. Investment Goals

Do these funds fit in your investment goals for the next few years? 

Don’t forget to recall your investment goals before you invest in any funds. If it fits, you have got yourself a nice opportunity to earn decent returns. 

2. Risk Tolerance

These funds are riskier than other bond funds. Invest only if your portfolio has some space for inviting moderate risk.

Get a complimentary portfolio analysis with us to find out your risk tolerance before you invest.

3. Investment Horizon

Most funds perform better in a longer duration. 

Credit risk funds tend to be highly volatile in the short term. Make sure you are fine with a longer investment horizon to avoid any losses. 

4. Expense Ratio

The expense ratio is a fee that fund houses will charge you for managing your investments. It can be higher for actively managed funds.

Don’t forget to compare the fees and expenses of funds before investing. Often, investors prefer to pay a slightly higher fee if the fund has the potential to deliver higher returns. 

5. Professional Advice

Credit risk funds could be tricky for new investors. If you are still willing to explore them, get professional advice to avoid confusion and possible losses. 

Here are a few things to look for in a financial advisor.

Tax Implications

Taxation on credit risk funds is similar to all other debt funds.

  • Tax on Short Term Capital Gains (investment held for < 3 years) = Same as your tax slab.
  • Tax on Long Term Capital Gains (investment held for > 3 years) = 20% with indexation benefits.

Who Should Invest In Credit Risk Funds?

Credit risk funds can be volatile and carry high risk. There is a chance of credit rating further degrading instead of boosting. 

These funds are not suitable for investors with low-risk appetites. 

Invest only if your risk profile and investment goals align with these funds. 


Credit risk funds can be a great addition to your portfolio to generate additional returns. Though you will come across a certain risk in the short-term horizon.

These funds are only suitable for investors with a high-risk appetite. We would recommend holding your investment for a longer duration to minimize volatility and losses.

If you are still confused, feel free to reach out to our advisors to plan your investments. 

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