Credit Risk Mutual Funds

Looking for a debt investment option that offers the potential for higher returns than traditional fixed income instruments? Credit risk funds can be an attractive option for investors willing to take calculated risk for better returns.

Credit risk funds predominantly allocate their investments in corporate bonds that rank low in terms of creditworthiness. As such investments pose a high amount of credit risk, they usually come attached with higher interest payments and hence can help managers achieve better returns. Credit Risk Funds are ideal for those individuals who comprehend the relationship between risk and returns and have a long-term outlook on their investments.

What are Credit Risk Funds?

Credit Risk Funds are the type of debt mutual funds which invest at least 65% of their investments in lower grade corporate bonds or other debt instruments. These kinds of bonds generally pay higher interest rates because they carry greater risks due to lower grades.

The main objective of credit risk funds is earning better return through investment in companies having the capability to enhance their financial standing in the coming years. The experts associated with the management of these funds undertake rigorous research and credit assessment prior to choosing any securities.

Features of Credit Risk Funds

• Greater Potential for Returns: The credit risk funds invest in lower-rated bonds which pay higher interest, hence offering greater returns than most other debt mutual funds.
• Professional Management: The fund manager evaluates creditworthiness carefully and manages the portfolio.
• Portfolio Diversification: These funds invest across multiple issuers and sectors, helping reduce the impact of a single credit event on the overall portfolio
• Appropriate for Longer-Horizon Investors: If the investment horizon of an investor is more than 3 years, the investment in such mutual funds might prove beneficial due to the skill of the fund manager in leveraging favorable credits.

How to Invest in Credit Risk Funds?

You can invest in credit risk funds by following simple process:

Step 1: Choose investment mode. You can invest through:

• AMC websites
• Online investment platforms provided by stockbrokers
• Mutual fund distributors

Step 2: Choose a suitable credit risk fund.

Step 3: Choose between Systematic Investment Plan (SIP) and Lump sum based on your goal and make investment.

Step 4: Make payment through UPI, netbanking or other available methods.

Why Invest in Credit Risk Funds?

• Potential for Higher Returns: One of the major strengths of Credit Risk Funds is the potential to earn better returns than many debt securities.
• Prospects for Gains from Improved Corporate Credit: If there is an improvement in the credit worthiness of a business, it might cause the prices of its bonds to rise, increasing profits for investors.
• Diversification within the Bond Market: Credit Risk Funds offer an opportunity to invest in another niche of the debt market, thus ensuring diversification within the fixed income investment portfolio.
• Institutional Credit Analysis: Credit Risk Fund Investors get access to expert advice on evaluating creditworthiness from institutional experts in the field.

Taxation Rules for Credit Risk Funds

The tax rule for investment in credit risk funds follows the tax structure provided for most debt-oriented mutual funds under existing regulations.

• All gains realised from redemption of units will be included in the net taxable income of the investor.
• Gains made are taxed at the appropriate tax slab applicable to the investor's net income.
• If dividends are declared and paid out, they too would attract income taxes as per the appropriate tax slab.

Tax regulations are dynamic. It is advised that investors seek the advice of a tax expert.