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Credit risk funds (essentially debt funds) are mutual funds that invest in low-rated corporate debt securities. These funds hold an objective to generate higher returns by investing in securities that provide a higher yield than high-rated funds. High-rated corporate or government securities hold a lower risk profile.
In simpler words, they are debt funds investing in debt assets that are of low credit quality. They invest in low-quality instruments and have a higher credit risk. The securities with a low credit rating usually offer high rates of interest; each of these debt instruments is ranked in an alphabetical code.
The securities with a credit rating below, 'AA' are known to have a high credit risk. Therefore, to boost the overall rating, the fund manager would choose other highly ranked securities among credit-risk debt funds. This balance provides a positive NAV.
Some top credit risk funds are listed in the table below.
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List of Credit Risk Mutual Funds in India
| Fund Name | Category | Risk | 1Y Returns | Rating | Fund Size(in Cr) |
|---|---|---|---|---|---|
| UTI Credit Risk Fund | Debt | Moderately High | 7.8% | 4 | ₹405 |
| Baroda BNP Paribas Credit Risk Fund | Debt | Moderately High | 8.6% | 4 | ₹163 |
| Nippon India Credit Risk Fund | Debt | High | 8.9% | 4 | ₹1,031 |
| IDBI Credit Risk Fund | Debt | Low to Moderate | 7.2% | 3 | ₹23 |
| Aditya Birla Sun Life Credit Risk Fund | Debt | Moderately High | 8.2% | 3 | ₹986 |
| Invesco India Credit Risk Fund | Debt | Moderate | 9.4% | 3 | ₹136 |
| ICICI Prudential Credit Risk Fund | Debt | High | 8.7% | 3 | ₹7,250 |
| SBI Credit Risk Fund | Debt | Moderately High | 9.4% | 3 | ₹2,556 |
| Axis Credit Risk Fund | Debt | Moderately High | 8.1% | 3 | ₹471 |
| DSP Credit Risk Fund | Debt | Moderate | 8.8% | 3 | ₹266 |
| HDFC Credit Risk Debt Fund | Debt | Moderately High | 8.2% | 2 | ₹8,191 |
| HSBC Credit Risk Fund | Debt | Moderate | 7.5% | 2 | ₹569 |
| Bandhan Credit Risk Fund | Debt | Moderately High | 7.2% | 2 | ₹366 |
| PGIM India Credit Risk Fund | Debt | Low to Moderate | 9.6% | 2 | ₹39 |
| Kotak Credit Risk Fund | Debt | High | 9.3% | 1 | ₹861 |
| View All |
Who Should Invest in Credit Risk Funds?
Individuals most suitable for credit risk debt funds are:
- Investors Who Have a Medium-Term Investment Horizon: If your investment horizon is for a period of 2 - 3 years, then these funds can be suitable for your investment choice. However, you will also have to consider having a greater risk tolerance.
- Investors Who Look for Better Returns from Fixed-Income Investments: A credit risk fund could be a good choice for your investment objective if your motive is to earn comparatively greater returns than other fixed-income investment vehicles.
- Investors with a Higher Risk Appetite: Credit funds are relatively riskier. Therefore, you will have to invest in them only if you have the appetite to tolerate the risk. If you choose to invest in low-risk and stable schemes, other forms of debt funds would suit your requirements.
Factors to Consider While Investing in Credit Risk Mutual Funds
The major factors one needs to consider while finding the best credit risk funds for their portfolio are-
- Financial Goal: These funds are suitable for investors with a moderate risk tolerance and look forward to portfolio diversification. It can assist them to look forward to more ways of earning a fixed income.
- Expense Ratio: It is essential to understand the expense ratio of the fund and understand how much of your final returns would be delivered.
- Exit Load: Before making investments, you will have to consider the exit load of the fund.
- Historical Data: It is easier to evaluate the performance of a fund through the historical data available. Therefore, you will have to note the past performance of the fund in detail.
Major Advantages
Here are some advantages of investing in credit risk mutual funds:
High returns than other debt funds: These funds invest in debt securities that have a low credit rating. Accordingly, they are associated with default risk. Nevertheless, to compensate for the high risk, the underlying corporate bonds have a premium coupon rate.
Tax benefits: STCG earned from a credit risk mutual fund is liable for taxation per the investor’s tax slab. However, LTCG is taxed at a flat 20% rate + indexation benefits. This contrasting tax treatment between STCG and LTCG is particularly beneficial for investors in the highest tax bracket since they have to pay only 20% tax on their gains, saving 10% in tax outgo.
Investment route: One can invest in the best credit risk mutual funds via two ways, namely Systematic Investment Plan (SIP) and lump sum. By choosing the SIP mode, investors can allocate their funds in a scheme by paying fixed monthly/quarterly/yearly instalments. Contrarily, the lump sum mode allows investors to buy scheme units by making a one-time payment.
Risks Involved While Investing in Credit Risk Funds
The risks that are associated with this kind of funds are:
- Low Liquidity: There is low liquidity in these funds. Since they contain lower credit quality through the underlying bonds, they can't be instantly sold in the market. This makes credit risk funds have liquidity limitations when compared to other funds, especially the ones that invest in high-credit quality papers.
- High Credit Risk: According to SEBI's regulations, credit risk funds invest 65% of their assets in bonds that are rated below AA. As these kinds of companies carry a relatively higher credit risk, your investment in these schemes will be subject to a certain level of risk.
FAQs
Q1. What is meant by a credit risk fund?
They are the type of mutual funds that invest in low-rated corporate debt securities, which are of a fixed-income nature. They aim to generate higher returns by investing in securities that yield more than high-rated funds.
Q2. Why should I invest in a credit risk fund?
Credit risk funds hold the potential to earn greater returns than other debt funds that invest in high-rated bonds. When the underlying securities do well, these funds may also pay out reasonably regular dividends. They have the potential to assist you in meeting your short to medium-term financial objectives.
Q3. Are credit risk funds a safe investment?
These funds carry a high amount of risk with them. Credit risk funds earn from interest payments and capital gains when the underlying security is downgraded because of non-repayment of principal and defaulting of interest payments, making these funds very volatile.
Q4. Who should invest in credit risk funds?
Credit risk funds can be a good option for those with a relatively medium-term investment horizon, a high risk appetite, and desire returns from fixed-Income investments.
Q5. What are the characteristics of a credit risk fund?
Credit risk funds hold the following features:
- 65% of the fund's portfolio is invested in lower than AA-rated bonds.
- The returns of this fund are not guaranteed.
- The major feature of this fund is that they are tax-efficient.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
Let's have a closer look
Now let us jump and check about these top 15 mutual fund schemes.
UTI Credit Risk Fund Direct Growth
Fund Performance: The UTI Credit Risk Fund has given 11.63% annualized returns in the past three years and -0.78% in the last 5 years. The UTI Credit Risk Fund comes under the Debt category of UTI Mutual Funds.
Minimum Investment Amount: The minimum amount required to invest in UTI Credit Risk Fund via lump sum is ₹500 and via SIP is ₹500.
| Min Investment Amt | ₹500 |
|---|---|
| AUM | ₹405Cr |
| 1Y Returns | 7.8% |
Baroda BNP Paribas Credit Risk Fund Direct Growth
Fund Performance: The Baroda BNP Paribas Credit Risk Fund has given 9.69% annualized returns in the past three years and 7.87% in the last 5 years. The Baroda BNP Paribas Credit Risk Fund comes under the Debt category of Baroda Mutual Funds.
Minimum Investment Amount: The minimum amount required to invest in Baroda BNP Paribas Credit Risk Fund via lump sum is ₹5,000 and via SIP is ₹500.
| Min Investment Amt | ₹5,000 |
|---|---|
| AUM | ₹163Cr |
| 1Y Returns | 8.6% |
Nippon India Credit Risk Fund Direct Growth
Fund Performance: The Nippon India Credit Risk Fund has given 9.18% annualized returns in the past three years and 4.71% in the last 5 years. The Nippon India Credit Risk Fund comes under the Debt category of Nippon India Mutual Funds.
Minimum Investment Amount: The minimum amount required to invest in Nippon India Credit Risk Fund via lump sum is ₹500 and via SIP is ₹100.
| Min Investment Amt | ₹500 |
|---|---|
| AUM | ₹1,031Cr |
| 1Y Returns | 8.9% |
IDBI Credit Risk Fund Direct Growth
Fund Performance: The IDBI Credit Risk Fund has given 10.04% annualized returns in the past three years and 3.83% in the last 5 years. The IDBI Credit Risk Fund comes under the Debt category of IDBI Mutual Funds.
Minimum Investment Amount: The minimum amount required to invest in IDBI Credit Risk Fund via lump sum is ₹5,000 and via SIP is ₹500.
| Min Investment Amt | ₹5,000 |
|---|---|
| AUM | ₹23Cr |
| 1Y Returns | 7.2% |
Aditya Birla Sun Life Credit Risk Fund Direct Growth
Fund Performance: The Aditya Birla Sun Life Credit Risk Fund has given 7.78% annualized returns in the past three years and 7.33% in the last 5 years. The Aditya Birla Sun Life Credit Risk Fund comes under the Debt category of Aditya Birla Sun Life Mutual Funds.
Minimum Investment Amount: The minimum amount required to invest in Aditya Birla Sun Life Credit Risk Fund via lump sum is ₹100 and via SIP is ₹100.
| Min Investment Amt | ₹100 |
|---|---|
| AUM | ₹986Cr |
| 1Y Returns | 8.2% |
Invesco India Credit Risk Fund Direct Growth
Fund Performance: The Invesco India Credit Risk Fund has given 7.35% annualized returns in the past three years and 6.59% in the last 5 years. The Invesco India Credit Risk Fund comes under the Debt category of Invesco Mutual Funds.
Minimum Investment Amount: The minimum amount required to invest in Invesco India Credit Risk Fund via lump sum is ₹1,000 and via SIP is ₹1,000.
| Min Investment Amt | ₹1,000 |
|---|---|
| AUM | ₹136Cr |
| 1Y Returns | 9.4% |
ICICI Prudential Credit Risk Fund Direct Plan Growth
Fund Performance: The ICICI Prudential Credit Risk Fund has given 7.32% annualized returns in the past three years and 8.2% in the last 5 years. The ICICI Prudential Credit Risk Fund comes under the Debt category of ICICI Prudential Mutual Funds.
Minimum Investment Amount: The minimum amount required to invest in ICICI Prudential Credit Risk Fund via lump sum is ₹100 and via SIP is ₹100.
| Min Investment Amt | ₹100 |
|---|---|
| AUM | ₹7,250Cr |
| 1Y Returns | 8.7% |
SBI Credit Risk Fund Direct Growth
Fund Performance: The SBI Credit Risk Fund has given 6.98% annualized returns in the past three years and 7.25% in the last 5 years. The SBI Credit Risk Fund comes under the Debt category of SBI Mutual Funds.
Minimum Investment Amount: The minimum amount required to invest in SBI Credit Risk Fund via lump sum is ₹5,000 and via SIP is ₹500.
| Min Investment Amt | ₹5,000 |
|---|---|
| AUM | ₹2,556Cr |
| 1Y Returns | 9.4% |
Axis Credit Risk Fund Direct Growth
Fund Performance: The Axis Credit Risk Fund has given 6.75% annualized returns in the past three years and 6.83% in the last 5 years. The Axis Credit Risk Fund comes under the Debt category of Axis Mutual Funds.
Minimum Investment Amount: The minimum amount required to invest in Axis Credit Risk Fund via lump sum is ₹5,000 and via SIP is ₹1,000.
| Min Investment Amt | ₹5,000 |
|---|---|
| AUM | ₹471Cr |
| 1Y Returns | 8.1% |
DSP Credit Risk Direct Plan Growth
Fund Performance: The DSP Credit Risk Fund has given 6.1% annualized returns in the past three years and 4.73% in the last 5 years. The DSP Credit Risk Fund comes under the Debt category of DSP Mutual Funds.
Minimum Investment Amount: The minimum amount required to invest in DSP Credit Risk Fund via lump sum is ₹500 and via SIP is ₹500.
| Min Investment Amt | ₹500 |
|---|---|
| AUM | ₹266Cr |
| 1Y Returns | 8.8% |
HDFC Credit Risk Debt Fund Direct Growth
Fund Performance: The HDFC Credit Risk Debt Fund has given 6.81% annualized returns in the past three years and 7.91% in the last 5 years. The HDFC Credit Risk Debt Fund comes under the Debt category of HDFC Mutual Funds.
Minimum Investment Amount: The minimum amount required to invest in HDFC Credit Risk Debt Fund via lump sum is ₹100 and via SIP is ₹100.
| Min Investment Amt | ₹100 |
|---|---|
| AUM | ₹8,191Cr |
| 1Y Returns | 8.2% |
HSBC Credit Risk Fund Direct Growth
Fund Performance: The HSBC Credit Risk Fund has given 6.33% annualized returns in the past three years and 5.29% in the last 5 years. The HSBC Credit Risk Fund comes under the Debt category of HSBC Mutual Funds.
Minimum Investment Amount: The minimum amount required to invest in HSBC Credit Risk Fund via lump sum is ₹5,000 and via SIP is ₹1,000.
| Min Investment Amt | ₹5,000 |
|---|---|
| AUM | ₹569Cr |
| 1Y Returns | 7.5% |
Bandhan Credit Risk Fund Direct Growth
Fund Performance: The Bandhan Credit Risk Fund has given 5.81% annualized returns in the past three years and 6.7% in the last 5 years. The Bandhan Credit Risk Fund comes under the Debt category of IDFC Mutual Funds.
Minimum Investment Amount: The minimum amount required to invest in Bandhan Credit Risk Fund via lump sum is ₹1,000 and via SIP is ₹100.
| Min Investment Amt | ₹1,000 |
|---|---|
| AUM | ₹366Cr |
| 1Y Returns | 7.2% |
PGIM India Credit Risk Fund Direct Growth
Fund Performance: The PGIM India Credit Risk Fund has given 4.08% annualized returns in the past three years and 5.31% in the last 5 years. The PGIM India Credit Risk Fund comes under the Debt category of PGIM India Mutual Funds.
Minimum Investment Amount: The minimum amount required to invest in PGIM India Credit Risk Fund via lump sum is ₹5,000 and via SIP is ₹1,000.
| Min Investment Amt | ₹5,000 |
|---|---|
| AUM | ₹39Cr |
| 1Y Returns | 9.6% |
Kotak Credit Risk Fund Direct Growth
Fund Performance: The Kotak Credit Risk Fund has given 5.94% annualized returns in the past three years and 6.76% in the last 5 years. The Kotak Credit Risk Fund comes under the Debt category of Kotak Mahindra Mutual Funds.
Minimum Investment Amount: The minimum amount required to invest in Kotak Credit Risk Fund via lump sum is ₹100 and via SIP is ₹100.
| Min Investment Amt | ₹100 |
|---|---|
| AUM | ₹861Cr |
| 1Y Returns | 9.3% |
