Credit risk is one of the most primary risks of investing in debt funds. It is the risk of default of the issuer of the security in repaying the principal and/or interest. Credit risk is higher with low-quality securities, and therefore, most conservative investors prefer mutual funds that invest only in high-credit quality debt securities. However, there is a type of debt fund that invests in low-credit quality securities - Credit Risk Funds.
Here, we will explore credit risk funds and discuss everything that you need to know about them.
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Credit Risk Mutual Funds are debt funds that invest in low-credit quality debt securities. These funds have higher risks since they invest in low-quality instruments.
Securities with a low credit rating tend to offer higher interest rates. Usually, instruments with a credit rating below AA are considered to carry a higher credit risk. The fund managers of Credit Risk Funds also select securities that might get a boost in rating (as per their analysis). This can have a positive impact on the NAV of the fund.
Here are some salient features of credit risk mutual funds:
Credit Risk Funds invest in debt securities and money market instruments that have a low credit rating since such instruments tend to offer higher interest rates. Also, when the rating of a security is upgraded, the fund benefits.
These Funds have lower interest rate risks, and the fund manager ensures that he keeps the average credit quality of the fund within control and the default probability relatively low. Usually, such funds tend to offer 2-3% higher returns than risk-free debt investments.
You can invest in credit risks through a mutual fund house. Find a reliable mutual fund house - sign up, complete KYC and start investing. Alternatively, you can also choose trustworthy platforms like Groww to start investing in these funds. You can download the Groww application from the Play Store or App Store. After downloading, complete the registration and KYC process. Next, select the fund of your choice and invest as per your risk profile.
You can invest in these funds for the following benefits:
Greater Returns
Credit risk funds have the potential to outperform debt mutual funds that invest in higher-rated bonds. When the fund's 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.
Tax Benefits
Since these funds are debt mutual funds, they are taxed according to your tax bracket.
If you hold your investment in an exceptionally short-term debt fund for longer than 36 months, the returns will be deemed long-term capital gains. For all debt mutual funds, such profits are taxed at 20% after indexation. As a result, long-term investment in ultra-short-term plans can assist you in reaping indexation benefits.
Gains on investments held for more than 36 months are termed long-term capital gains. After indexation, such gains are taxed at 20%.
Q1. What is credit risk mutual fund meaning?
Credit Risk funds invest 65% of their assets in corporate bonds with ratings lower than those of the highest-rated instruments.
Q2. What is the benefit of a credit risk fund investment?
These funds invest in lower-rated bonds and may provide higher-than-average returns if the market performance aligns with your investment.
Q3. Who are credit risk funds most suitable for?
These funds are suitable for investors looking for better returns from fixed-income investments, those with a medium-term investment horizon, and those with a higher risk appetite.
Q4. Is a credit risk fund the same as a debt fund?
A credit risk fund is, indeed, a type of debt mutual fund. These funds primarily invest in fixed-income securities with lower credit ratings.
Q5. Are credit risk funds safe?
These funds are comparatively risky than other mutual funds. These funds are more suitable for investors having a very high risk appetite.
Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.
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