CFA, Finance, FRM

What are Credit Risk Debt Funds?

Credit Risk Debt Funds

Credit risk funds are a type of debt funds that invests in low-credit rated debt securities. Credit risk debt funds invest around 65% of their portfolio in less than AA-rated securities. The lower rating indicates the possibility of default in repayment of investor’s money therefore, these funds have higher credit risk. By taking a higher risk and investing in lower-rated securities, it produces higher returns. Thus, there is a likelihood for investors to earn double-digit.

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How the funds earn income?

Credit risk funds make a return by earning interest on securities and they can earn capital gain when the ratings are upgraded. These funds can fetch 2-3 percent more than the risk-free investments and investors tend to invest in these funds by taking a little risk.

Who should invest in these funds?

  • There is a risk component attached to this fund and also there are chances the ratings of the lower-rated debt securities getting downgraded.
  • Even good performing funds can get downgraded and there are possibilities of it hitting into liquidity risk. These funds rise and fall quite often consequently, impacting the portfolio of the investor.
  • Thus, an investor who can bear the risk (aggressive investors) should only invest and risk-averse investors should stay out. Hence, an investor must keep in mind a liquidity aspect along with the risk appetite before investing.
  • The investor should keep in mind to invest in large scale funds as it will be more diversified and the risk will be minimal. First-time investors should choose the fund with a lower expense ratio.

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Due to defaults and downgraded ratings, there was a fall in Net asset value (NAV) and there were large outflows. Thus, the perception of debt funds has changed over the years. Investors should analyze before tarring everything with the same brush.

Top 6 Performing Credit Risk Mutual Funds

As can be seen in the table below ICICI Prudential Credit Risk fund Growth has given 8.28% annualized returns in the last three years and 9.2% in the last year 2 followed by IDFC Credit Risk Fund Direct-Growth, HDFC Credit Risk Debt Fund and so on.

Mutual Fund One-year return Three-year return
ICICI Prudential Credit Risk fund Growth 9.2% 8.28%
IDFC Credit Risk Fund Direct-Growth 8.38% 7.47%
HDFC Credit Risk Debt Fund Growth 7.67% 6.99%
SBI Credit Risk Fund Growth 7.25% 6.87%
Kotak Credit Risk Fund Growth 6.37% 6.96%
Axis Credit Risk Fund Growth 4.25% 6.55%

Author: Swati Krishnamurthy

About the Author:

Swati is a freelance writer. She is a Financial Quality Compliance specialist having an integrated knowledge and experience in Logistics, Audit, and Risk-mitigation for manufacturing and service sectors. Her passion for finance grew as she scored centum in financial management during her master’s degree. She’s a classical dancer who performs to express complex emotions through her dancing and writes to express complex concepts into simple words.

Related: What are Mutual Funds?

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