Credit Risk Mutual Funds
Credit risk funds invest in riskier, low-rated corporate debt securities. These are ideal for high-income investors who are familiar with market risks and are seeking higher returns from debt funds.
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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.
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.
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.
Taxability of Credit Risk Mutual Funds
- The taxability of credit risk mutual funds remains the same as how we tax 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. As you may know already, 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 Rs. 5000 in a financial year.
Risk Involved in Credit Risk Mutual Funds
The following are some fo 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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Poor Liquidity:
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. -
High 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.
Advantages of Credit Risk Mutual Funds
- In comparison with other debt funds, credit risk mutual funds have the ability to provide higher returns to investors. The investment risk is higher in these funds and is complimented usually by a high coupon rate. Investors who are looking to fulfil their medium-term to long-term financial goals and earn regular income can opt for these funds.
- That being said, the performance of these funds is purely dependent on the expertise of the fund manager. Investors would benefit from a skilled fund manager who is able to yield higher returns than risk-free debt funds.
Top Credit Risk Mutual Funds to Invest in
The following are some of the best credit risk mutual funds that one can consider investing in
Name of the Fund | Assets Under Management (Rs. in crore) | Minimum Investment (Rs.) | 3Y CAGR % | 5Y CAGR % |
ICICI Prudential Credit Risk Fund | 7,828.43 | 100 | 8.00 | 8.33 |
HDFC Credit Risk Debt Fund | 8,572.56 | 100 | 8.35 | 8.15 |
Baroda BNP Paribas Credit Risk Fund | 181.22 | 5000 | 12.39 | 7.82 |
SBI Credit Risk Fund | 2,817.99 | 5000 | 7.81 | 7.63 |
Axis Credit Risk Fund | 595.87 | 5000 | 7.55 | 7.17 |
The above-mentioned top funds are for informational purposes only and are not recommendations. The funds are based on a 5-yr CAGR, which is subject to change frequently. Check out real-time data on Angel One.
ICICI Prudential Credit Risk Fund
- This fund is being managed by Manish Banthia since January 2018. As on April 30, 2023, the fund has an AUM of Rs. 7,828.43 crore and the minimum investment value is Rs. 100. expense ratio 0.88% under direct investment mode and there is no exit load if redeemed or switched out after one year from the date of allotment.
HDFC Credit Risk Debt Fund
- This fund is being managed by Shobhit Mehrotra since March 2014. As on April 30, 2023, the fund has an AUM of Rs. 8,572.56 crore and the minimum investment value is Rs.100. expense ratio 0.95% under direct investment mode and there is no exit load if redeemed after eighteen months from the date of allotment.
Baroda BNP Paribas Credit Risk Fund
- This fund is being managed by Alok Sahoo since January 2015. As on April 30, 2023, the fund has an AUM of Rs. 181.22 crore and the minimum investment value is Rs. 5000. expense ratio 0.78% under direct investment mode and there is no exit load if redeemed or switched out after one year from the date of allotment.
SBI Credit Risk Fund
- This fund is being managed by Lokesh Mallya since February 2017. As of April 30, 2023, the fund has an AUM of Rs. 2,817.99 crore where the minimum investment value is Rs. 5000. The expense ratio of the fund stands at 0.92% under direct investment mode and has no exit load if redeemed or switched out after thirty-six months from the date of allotment.
Axis Credit Risk Fund
- This fund is being managed by Devang Shah since June 2014. As of April 30, 2023, the fund has an AUM of Rs. 595.87 crore and the minimum investment value is Rs. 5000. expense ratio 0.81% under direct investment mode and currently has no exit load if redeemed or switched out after twelve months from the date of allotment.
How do Credit Funds work?
There are as many investors as there are funds to meet practically any financial need in mutual fund investing. For those investors who don’t mind bearing the risks that are posed by equity, there are equity funds, especially those that allocate most of their capital to small-caps. On the other hand, debt mutual funds are readily available for investors that are risk-averse. Credit risk funds are those funds that fall within the debt mutual fund category, yet they may be considered risky relative to other funds in this category.
Credit risk mutual funds work by investing their capital in securities of the corporate sector. These securities are low-rated securities with a fixed-income status. Similar to debt funds, these funds 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.
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.
Factors to Consider Before Investing in Credit Mutual Funds
Before you invest in credit-risk debt funds, there are some things you should consider. These are highlighted below:
- 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.
- 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.
- 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.
- Consider your own 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.
FAQs

Every type of mutual fund comes with its own set of risks. Credit risk mutual funds also have some risks attached to them. However, compared to other debt funds, credit funds possess higher levels of risk.

Yes, if you are an investor looking for diversification of your portfolio and to fulfil your medium-term and long-term financial goals then you could venture into investing in a credit risk mutual fund if it satisfies your requirements.

The returns that one can expect as an investor of credit risk mutual funds are like that of a typical debt fund. An investor could experience a higher yield subject to market performance and volatility. However, these funds could also potentially create losses given the high-risk levels.

The risks of investing in credit risk mutual funds are like that of traditional debt funds. Investors need to consider risk factors such as poor liquidity, and unsuitability for a risk-averse approach despite the promise of better returns involving high-risk levels.

Yes, they are taxable. Short-term capital gains tax is applicable for a holding period of up to 36 months and beyond that duration and long-term capital gains tax is applicable with an indexation benefit.

This is very subjective and varies from person to person depending on one’s risk appetite. Ideally, invest that amount that feels comfortable and reevaluate it periodically depending on your requirements.
Mutual Fund Categories
Other AMCs
- ICICI Prudential Mutual Funds
- Axis Mutual Funds
- Nippon Life India Mutual Funds
- UTI Mutual Funds
- Mirae Mutual Funds
- DSP Mutual Funds
- Bandhan Mutual Funds
- Tata Mutual Funds
- HSBC Mutual Funds
- Canara Robeco Mutual Funds
- Invesco Mutual Funds
- Sundaram Mutual Funds
- Kotak Mahindra Mutual Funds
- HDFC Mutual Funds
- Aditya Birla Sun Life Mutual Funds
- SBI Mutual Funds
FAQs

Every type of mutual fund comes with its own set of risks. Credit risk mutual funds also have some risks attached to them. However, compared to other debt funds, credit funds possess higher levels of risk.

Yes, if you are an investor looking for diversification of your portfolio and to fulfil your medium-term and long-term financial goals then you could venture into investing in a credit risk mutual fund if it satisfies your requirements.

The returns that one can expect as an investor of credit risk mutual funds are like that of a typical debt fund. An investor could experience a higher yield subject to market performance and volatility. However, these funds could also potentially create losses given the high-risk levels.

The risks of investing in credit risk mutual funds are like that of traditional debt funds. Investors need to consider risk factors such as poor liquidity, and unsuitability for a risk-averse approach despite the promise of better returns involving high-risk levels.

Yes, they are taxable. Short-term capital gains tax is applicable for a holding period of up to 36 months and beyond that duration and long-term capital gains tax is applicable with an indexation benefit.

This is very subjective and varies from person to person depending on one’s risk appetite. Ideally, invest that amount that feels comfortable and reevaluate it periodically depending on your requirements.