Today, we will look at a very interesting option that could fit into your financial plan. We are talking about the credit risk debt fund. A good credit fund tries to give you a bit more reward by taking a calculated risk.
We will explore everything you need to know about a credit risk fund in this clear guide. You will understand how credit risk mutual funds work to build your wealth. By the end, you will also discover the best credit risk funds available right now. Let us begin.
What are Credit Risk Funds?
Credit risk funds are a special category of debt mutual funds in India. The Securities and Exchange Board of India (SEBI) officially introduced this category in October 2017. These credit fund mostly invest your money in corporate bonds and commercial papers issued by various companies.
According to SEBI rules, these funds must invest at least 65 percent of their money into corporate bonds that have a lower credit rating. Specifically, they have to pick bonds that are rated AA or even lower. Highly rated bonds are very safe, but they pay a lower interest rate to investors.
Lower rated bonds carry a bit more risk, so they offer a higher interest rate to attract money. This higher interest rate is the main reason why these funds can generate better returns. Fund managers actively look for companies that are fundamentally strong but currently have a lower rating.
Best Credit Risk Mutual Funds
Choosing the right fund requires looking at past performance, fund size, and costs. We have gathered data on the best performing direct plan options available in the market today.
The table below shows the key details like Net Asset Value (NAV), Asset Under Management (AUM), and returns over different time periods.
| Fund Name | NAV (₹) | AUM (₹ Cr) | 1-Year Return (%) | 3-Year Return (%) | 5-Year Return (%) | Expense Ratio (%) |
|---|---|---|---|---|---|---|
| ICICI Prudential Credit Risk Fund | 37.56 | 5,990 | 7.66 | 8.74 | 7.83 | 0.73 |
| Aditya Birla Sun Life Credit Risk Fund | 27.19 | 1,353 | 11.91 | 12.63 | 10.60 | 0.79 |
| Nippon India Credit Risk Fund | 41.17 | 1,343 | 7.33 | 8.71 | 9.07 | 0.71 |
| HSBC Credit Risk Fund | 36.68 | 475 | 5.38 | 11.53 | 9.26 | 0.95 |
| Axis Credit Risk Fund | 25.61 | 355 | 7.29 | 8.34 | 7.44 | 0.8 |
| UTI Credit Risk Fund | 20.34 | 253 | 5.6 | 7.52 | 10.02 | 1.04 |
| DSP Credit Risk Fund | 59.35 | 242 | 9.8 | 16.6 | 13.0 | 0.40 |
| Baroda BNP Paribas Credit Risk Fund | 25.93 | 174 | 6.28 | 8.27 | 9.15 | 0.80 |
| Invesco India Credit Risk Fund | 2292.3 | 159 | 6.55 | 9.30 | 8.20 | 0.28 |
| BOI AXA Credit Risk Fund | 14.16 | 105 | 17.05 | 9.88 | 27.7 | 1.15 |
Ratings of Credit Risk
To fully understand these funds, we must understand how bonds are rated in India. Rating agencies like CRISIL and ICRA act as report cards for companies that borrow money.
These agencies check the financial health of a company and assign a letter grade. This grade tells investors how safe it is to lend money to that company. Here is a breakdown of the rating scale provided by CRISIL and ICRA:
| Rating for Debt Securities | CRISIL | ICRA |
|---|---|---|
| Highest Safety | CRISIL AAA | ICRA AAA |
| High Safety | CRISIL AA | ICRA AA |
| Adequate Safety | CRISIL A | ICRA A |
| Moderate Credit Risk | CRISIL BBB | ICRA BBB |
| Moderate Default Risk | CRISIL BB | ICRA BB |
| High Default Risk | CRISIL B | ICRA B |
| Very High Default Risk | CRISIL C | ICRA C |
| Default | CRISIL D | ICRA D |
Credit risk mutual funds mostly focus on the AA and A rated categories. They avoid the extremely safe AAA bonds to get better interest rates. They also hope these AA companies will soon become AAA companies, which increases their profits.
Features of Credit Risk Mutual Funds
These funds come with some unique features that make them different from your regular bank deposits. Here are the main features you should know:
- Lower-Rated Bonds: Unlike traditional debt mutual funds that mostly buy highly rated safe bonds, credit risk funds specifically invest in bonds rated ‘AA’ and below.
- Diversified Portfolio: To manage the risks and keep your money safe from individual company defaults, fund managers wisely spread their investments across many different issuers.
- Steady Interest Payments: Investors can benefit from regular interest payments, which provide a very consistent income stream even when the markets are moving.
Read Also: Best Target Maturity Mutual Funds in India
Advantages of Investing in Credit Risk Mutual Funds
Adding these funds to your portfolio can provide several powerful benefits.
- Higher Interest Income: The biggest advantage is the extra money you can make. Because these funds invest in lower rated bonds, they usually offer 2 to 3 percent more return than risk free government funds.
- Profits from Rating Upgrades: This is a hidden benefit that boosts your returns. If a company improves its business, rating agencies will upgrade its bond rating from AA to AAA. When this happens, the bond price goes up, and your mutual fund value increases.
- Good for Economic Recovery: When the Indian economy is growing rapidly, companies make more profit. This makes it easier for them to repay loans, reducing the risk in these funds while keeping returns high.
- Diversification: If you already have fixed deposits and safe government bonds, this fund adds variety. It helps you build a balanced portfolio that fights inflation effectively.
Disadvantages of Investing in Credit Risk Funds
While the returns are attractive, we must honestly discuss the negative sides as well. You should be aware of these risks before investing.
- Default Risk: This is the scariest risk for any debt fund. If a company goes bankrupt and cannot pay its interest or loan amount, the fund loses money. Because these funds pick lower rated bonds, the chance of a default is naturally higher.
- Liquidity Risk: Sometimes, investors panic and try to withdraw their money all at once. To give the money back, the fund manager has to sell the bonds in the market. Lower rated bonds are hard to sell quickly, which can force the manager to sell them at a huge loss.
- High Volatility: Regular debt funds usually grow in a straight, steady line. Credit risk funds can jump up and down a lot more, almost resembling the stock market on bad days.
- Downgrade Risk: Just like an upgrade makes you money, a rating downgrade loses you money. If a company starts doing poorly, its bond rating drops, and the fund value falls immediately.
Who should invest in credit risk funds
Because of the unique mix of high rewards and high risks, this category is not meant for every single person.
- If you get worried easily when your investment value drops, you should completely avoid these funds.
- These funds are best suited for investors who have a high tolerance for risk. You must be willing to see some temporary negative returns during bad market days.
- Time is also a very important factor here. You should only invest if you do not need the money for at least 3 to 5 years.
This long time period helps the fund recover from any sudden market shocks. It also gives the companies enough time to get their bond ratings upgraded.
Factors to Consider Before Investing in a Credit Risk Fund
You should never invest blindly. Always check a few important details before you commit your hard earned money.
- Check the AUM Size: Always look at the Asset Under Management. You should prefer funds that have a very large AUM. A bigger fund can invest in hundreds of companies, so if one company defaults, your overall loss is very small.
- Fund Manager History: Find out who is running the fund. An experienced manager who has survived previous market crashes is very important here. You are basically trusting their skill to pick good companies.
- Look at the Expense Ratio: The expense ratio is the fee the mutual fund company charges you. Always try to choose “Direct Plans” instead of “Regular Plans” because direct plans have much lower fees. Lower fees mean higher final returns for you.
- Review the Portfolio: Most apps will show you where the fund has invested its money. Ensure the fund is not putting too much money into just one single risky industry.
How to Invest in Credit Risk Mutual Funds
Here is how you can easily start investing:
- Open Your Account: First, download the Pocketful app or visit their website. You can open your account with zero account opening charges and zero annual maintenance charges.
- Complete Digital KYC: As per government rules, you need to verify your identity. You can easily upload your PAN card and Aadhaar details on the app to complete your KYC in minutes.
- Select Your Fund: Once your account is active, go to the mutual funds section. You will find all the top credit risk funds listed there. You can compare their returns and check their portfolios clearly.
- Start a SIP or Lumpsum: You don’t need a massive amount of money to begin. You can start a Systematic Investment Plan (SIP) with as little as ₹500 a month. If you have extra savings, you can also do a one time lump sum investment.
- Track Your Growth: Pocketful provides a clean dashboard to track all your investments. You can easily monitor how your credit risk fund is performing every single day.
Read Also: Best Money Market Mutual Funds in India
Conclusion
We hope this guide helped you understand the exciting world of credit risk mutual funds. While traditional fixed deposits offer safety, they often struggle to beat the rising cost of living. Credit risk funds offer a realistic way to earn that extra bit of return.
Yes, they come with certain risks, but with a smart fund manager and a long term view, these risks can be managed well. By choosing funds with large AUMs and starting small SIPs through user friendly platforms like Pocketful, you can confidently take a step towards better financial growth. Happy investing.
Frequently Asked Questions (FAQs)
What is the simple meaning of a credit risk mutual fund?
It is a type of debt mutual fund that invests at least 65 percent of its money into lower rated corporate bonds. It takes a slightly higher risk to generate better interest returns for you.
What are the main benefits of investing in these funds?
The main benefit is the potential to earn 2 to 3 percent higher returns than safe government debt funds. You also get the chance to make extra profit if the bond ratings get upgraded in the future.
What is the biggest risk I should worry about?
The biggest risk is “default risk.” If the company that issued the bond goes bankrupt and cannot pay back the money, the mutual fund will suffer a loss.
How long should I stay invested in these funds?
You should only use these funds if you can keep your money invested for at least 3 to 5 years. This gives the fund enough time to recover from any short term market panics.
How to use and invest in these funds easily?
You can use digital investment platforms like Pocketful to invest. Simply complete your digital KYC, choose a top performing credit risk fund, and start a monthly SIP with as little as ₹500.
