Best Credit Risk Funds
About Credit Risk Mutual Funds
- Conventionally, aggressive investors with a high-risk appetite invest in equity funds, especially those with a high component of small cap stocks. Debt funds, on the other hand are considered relatively less risky. However, credit risk funds are one such class of mutual funds that fall under the debt mutual funds category but are considered a fairly risky investment. They invest in the corporate sector via low-rated fixed-income securities. In other words, like debt funds, they invest in debt instruments, but they concentrate on those instruments which are more risky and rated low by credit rating agencies but also have a chance of higher returns.
How Do Credit Risk Funds Work?
Credit risk mutual funds invest their capital in securities of the corporate sector. These securities are low-rated securities with a fixed-income status. Similar to debt funds, these invest in the instruments of debt, but they focus on instruments that are rated low by credit rating bodies and are consequently more risky. However, like equities give you the potential for high returns, these low-rated securities may also yield potentially high returns.
Features of Credit Risk Mutual Funds
- SEBI guidelines dictate that credit risk mutual funds are required to invest a minimum of 65% of their fund portfolio in corporate debt securities having a rating of AA or lower. However, when the rating of the underlying securities is raised later, the fund benefits from such improved ratings (due to increased value of the bonds) which in turn results in higher capital gains for the investors.
- Credit risk mutual funds carry a higher credit risk than funds that invest exclusively or primarily in top-rated debt instruments with the highest rating of AAA. Because the risk is high, the instruments also tend to offer interest at a higher rate. Credit risk here refers to the risk of default taken by investors, and it is on the higher side for such securities.
Advantages of Credit Risk Mutual Funds
- Higher Potential Returns: Credit risk funds offer the potential for higher returns compared to other debt funds.
- Higher Yield: Credit risk funds tend to have higher yields than other fixed-income options making them attractive for those seeking income.
- Diversification: These funds hold a diversified portfolio of bonds, spreading the risk across various issuers and sectors, which can help mitigate the impact of defaults.
- Professional Management: Like all mutual funds, these are also managed by experienced fund managers who are well-versed with credit quality, maturities, and sectors, aiming to optimise returns.
- Hegde against inflation: These funds can provide a hedge against inflation when their returns beat inflation rates.
- Flexible investment horizons: Credit risk funds offer flexibility in investment duration, allowing investors to choose short- or long-term strategies as per their financial goals.
- Easy Access: Investing in credit risk funds allows retail investors to access corporate and high-yield bonds, which may otherwise not be readily available directly.
Risk Involved in Credit Risk Mutual Funds
The following are some of the risk factors that an investor should look at when assessing whether to invest in a credit risk fund or not
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- Liquidity Risk: For example, if a fund has invested in assets which pay back at a much later date, but they need to resolve multiple large redemptions at the same time then the fund managers might face a problem. In such cases, they may have to sell off some of the assets that they own. At that point, if they fail to sell off their assets due to a lack of liquidity in the market then they might end up in a bit of a crisis.
Furthermore, when too many assets of a scheme are downgraded then it becomes extremely difficult to liquidate them due to the bad reputation and expectation of further decline.
- Credit Risk:Credit risk funds are not suitable for all types of investors, especially risk-averse ones. Investors should be able to resist the high risk involved when investing in these funds as the risk of default is high.
Factors To Consider Before Investing in Credit Risk Mutual Funds
Before you invest in credit-risk debt funds, there are some things you should consider. These are highlighted below:
- Evaluate the underlying assets: Credit risk mutual funds invest in those debt securities that have been given low credit ratings by certain agencies and authorities. Hence, the chances of the credit rating rising (depending on individual companies) may be potentially low and this could increase risks in investment. Contrastingly, credit ratings may rise, taking potential gains up. Nonetheless, depending on the credit rating of a company to learn about the company itself is not enough. Investors who wish to invest in credit risk mutual funds may consider the individual company securities invested in and find out more about the company’s potential for growth.
- Diversified portfolio: While you are reflecting on investment in a credit-risk mutual fund, you may want to consider investing in a fund with a potentially large corpus of credit-risk securities. This mitigates your risk in case some securities portray poor performance compared to others. You may want to consider a credit risk fund with a diversified portfolio of debt instruments so your potential risk is balanced.
- Risk appetite: Credit risk mutual funds are debt funds that may have inherent risks and potentially low returns compared to the returns of other kinds of mutual funds like equity funds. Consequently, investors should consider keeping their losses at a minimum while investing. You may have to incur costs like expense ratios, which are fees that funds charge investors for managerial costs. You may, therefore, consider mutual funds with expense ratios on the lower side.
- Financial goals: Consider your financial goals and requirements wherever you wish to invest. You may also address and approach certain investment options like credit risk mutual funds against your own financial portfolio so that you can allocate your capital adequately and mitigate risk effectively.
Who Should Invest in Credit Risk Mutual Funds?
- Despite belonging to the debt mutual funds category, credit-risk mutual funds are high-risk in nature. Investors who have high-income levels and fall under the highest income tax bracket are likely to have a higher risk appetite and such people are well suited for credit risk funds. Similarly, people who are already comfortable with investing in high-risk assets such as equity can definitely consider investing in credit risk funds. This is true, especially for those who believe that the risks in investing in the debt market is low (perhaps because of a favourable interest rate environment) and they therefore want to invest in instruments that give the highest returns possible.
Taxability of Credit Risk Mutual Funds
The credit risk mutual funds are taxed exactly like debt funds. These funds are liable to capital gains depending on the period of holding. It is taxed as per the investor’s income tax slab if the funds are held for less than 3 years. If the holding period exceeds 3 years, then the fund is taxed at 20% with an indexation benefit. Here, the indexation benefit enables investors to inflate the purchase price to account for inflation adjustment. The taxation of these funds is simplified in the table given below.
| Type of capital gain | Period of holding | Tax rate |
| Short-term capital gains | Less than 3 years | Income tax bracket of the investor. |
| Long-term capital gains | 3 years and more | 20% along with indexation benefit. |
With respect to taxing dividends, when an investor earns dividends on their credit risk fund, the dividends are considered as a part of their taxable income and are subject to taxation at the applicable rate based on their income tax bracket. Also, there is a 10% TDS on the dividend amount if it exceeds ₹5,000 in a financial year.
How To Invest in Credit Risk Funds?
Investing in the credit risk Mutual Fund is hassle-free when done through your Angel One account. You just have to follow these simple steps:
Step 1: Log in to your Angel One account.
Note: In case you do not have an account with Angel One, you can open a demat account with us in under a few minutes by submitting the necessary documents.
Step 2: Determine a credit risk fund that suits your needs and risk profile. You can learn more about each credit risk fund on the Angel One app. Things to consider at this stage are:
- Search for the fund you want to invest in.
- Analyse the fund’s past performance, tax incidence, and the sectors and companies it invests in. You can also calculate the potential returns using the calculator.
- Evaluate the fund’s level of risk, its ratings and expense ratio.
Step 3: Once you finalise the credit risk fund(s) you want to invest in, open your Angel One account, go to the Mutual Funds section, and look for it.
- Decide whether you want to invest via SIP or make a one-time investment
- Decide your monthly SIP date. Now, enter the amount you want to invest and choose the payment mode.
- After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments.
Top 5 Credit Risk Mutual Funds to Invest in
The following are the top Credit Risk Funds in India:
| Name of the Fund | AUM (₹ Cr) | Expense Ratio | Average YTM | Category YTM | CAGR 3Y | CAGR 5Y |
| HDFC Credit Risk Debt Fund | 7344.44 | 1.00 | 8.49 | 8.18 | 6.97 | 7.80 |
| ICICI Pru Credit Risk Fund | 6287.09 | 0.76 | 8.56 | 8.18 | 7.74 | 8.01 |
| SBI Credit Risk Fund | 2278.20 | 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 |
The above-mentioned funds are for informational purposes only and are not recommendations. The funds are ranked based on AUM as of January 2025.
HDFC Credit Risk Debt Fund
The HDFC Credit Risk Debt Fund has the highest AUM among the 5 funds, at ₹7,344.44 crore, and an expense ratio of 1.00%, which is the highest in the list.
The fund’s average YTM is 8.49%, slightly above the category YTM of 8.18%. Over the past 3 years, it has delivered a CAGR of 6.97%, ranking 5th in 3-year performance, while its 5-year CAGR of 7.80% ranks 4th in the list.
ICICI Pru Credit Risk Fund
The ICICI Pru Credit Risk Fund has an AUM of ₹6,287.09 crore and an expense ratio of 0.76%.
The fund’s average YTM is 8.56%, which is higher than the category YTM of 8.18%. Over the past 3 years, it has delivered a CAGR of 7.74%, ranking 3rd in 3-year performance, while its 5-year CAGR of 8.01% ranks 3rd in the list.
SBI Credit Risk Fund
The SBI Credit Risk Fund has an AUM of ₹2,278.20 crore and an expense ratio of 0.89%.
The fund’s average YTM is 8.61%, which is higher than the category YTM of 8.18%. Over the past 3 years, it has delivered a CAGR of 7.67%, ranking 4th in 3-year performance, while its 5-year CAGR of 7.68% ranks 5th in the list.
Nippon India Credit Risk Fund
The Nippon India Credit Risk Fund has an AUM of ₹980.94 crore and an expense ratio of 0.69%.
The fund’s average YTM is 8.97%, the highest among the 5 funds, and significantly above the category YTM of 8.18%. Over the past 3 years, it has delivered a CAGR of 7.56%, ranking 5th in 3-year performance, while its 5-year CAGR of 6.12% is the lowest in the list.
Aditya Birla SL Credit Risk Fund
The Aditya Birla SL Credit Risk Fund has the lowest AUM among the 5 funds, at ₹933.02 crore, and an expense ratio of 0.67%, which is the lowest in the list.
The fund’s average YTM is 8.26%, slightly above the category YTM of 8.18%. Over the past 3 years, it has delivered a CAGR of 9.75%, the highest in the list, while its 5-year CAGR of 9.21% also ranks 1st among the funds.
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