Credit risk funds are mutual funds where at least 65% of the underlying assets are rated AA or lower. They’re debt funds where most of the investment is in corporate bonds with relatively lower credit ratings. The risk of default in those corporate bonds is higher than the bonds rated AAA. However, these mutual fund investments tend to offer 2% to 3% higher returns than less-riskier instruments.
What are corporate bond funds?
Corporate bond funds are mutual funds where at least 80% of the investments are in high-rated corporate bonds. The risk of default is lower, and so are the returns.
Where should you invest – credit risk funds or corporate bond funds?
| Particulars | Credit Risk Funds | Corporate Bond Funds |
| Underlying assets | Minimum 65% investment in lower-rated instruments | Minimum 80% investment in high-rated corporate bonds |
| 1-Year returns of the top 5 performing funds* | 8.48% – 11.12% | 6.23% – 6.95% |
| 3-Year returns of the top 5 performing funds* | 8.16% – 9.64% | 9.41% – 10.58% |
| Risk | Comparatively higher risk of default | Comparatively lower risk of default |
| Investment opportunity | Investments in the top-performing funds with high returns and a possibility of a credit rating upgrade in the future | Investments in the top-performing funds where the underlying assets are bonds issued by Public Sector Undertakings (PSUs) and banks |
| Returns strategy | Invest in funds with a large Assets Under Management (AUM), lower expense ratio, diversified underlying securities, and reputed Asset Management Companies (AMCs) managed by fund managers with impressive track records | Seasoned investors should consider funds with underlying assets that are lower-rated (AA-) for higher returns in the medium term. Novice investors should prefer high rated funds for short-term investments |
*Based on a general analysis and calculation of the returns offered by each mutual fund
FAQs
- I’m a small investor. Can I invest in debt securities?
- Yes, you can. Mutual funds, like credit risk funds and corporate bond funds, invest in fixed-income securities.
- Can I expect great returns from my investment in debt funds?
- Debt funds, typically, have lower returns than equities and higher returns than relatively risk-free avenues, like bank fixed deposits.
- Why should I invest in debt instruments through mutual funds?
- Debt instruments, inherently, have the risk of default. Therefore, investments in debt instruments require thorough and constant research. Credit risk funds and corporate bonds funds could help you benefit from greater diversification as the fund’s corpus would be sizable. Also, reputed AMCs, with experienced fund managers, tend to be better equipped at timing the market. Investing in debt instruments through mutual funds is thus recommended.