Welcome to the world of high-yield debt investing! If you're looking for an investment option that offers the potential for higher returns, you may have come across Credit Risk Funds. Credit Risk Funds are a type of debt mutual fund that invests primarily in fixed income securities such as corporate bonds and debentures that carry a higher credit risk compared to government securities. In this blog, we'll dive into the basics of Credit Risk Funds and help you understand the risks and rewards of investing in this type of fund. We'll also provide you with some key factors to consider when choosing a Credit Risk Fund that's right for you.
A Credit Risk Fund is a type of debt mutual fund that invests primarily in fixed income securities such as corporate bonds and debentures that carry a higher credit risk compared to government securities. The fund aims to generate higher returns than other debt funds by investing in debt securities rated lower than AAA.
Risks involved in investing in Credit Risk Funds:
Credit risk: Credit risk funds invest in debt securities rated lower than AAA, which carry a higher credit risk compared to other debt securities. The fund's returns are subject to the creditworthiness of the issuer.
Interest rate risk: Like other debt funds, credit risk funds are exposed to interest rate risk, where an increase in interest rates could lead to a decline in the value of the fund's holdings.
Liquidity risk: The fund may have difficulties in selling its bonds if the market for corporate debt securities is illiquid.
Difference between Gilt Fund and Credit Risk Fund:
Investment objective: Gilt Funds invest primarily in government securities, while Credit Risk Funds invest in corporate bonds and debentures that carry a higher credit risk.
Credit risk: Gilt Funds have minimal credit risk as they invest in government securities, while Credit Risk Funds have a higher credit risk due to their investment in lower-rated corporate debt securities.
Returns: Gilt Funds generally have lower returns compared to Credit Risk Funds, which aim to generate higher returns by taking on a higher level of credit risk.
Risks involved in investing in Credit Risk Funds:
Credit risk: Credit risk funds invest in debt securities rated lower than AAA, which carry a higher credit risk compared to other debt securities. The fund's returns are subject to the creditworthiness of the issuer.
Interest rate risk: Like other debt funds, credit risk funds are exposed to interest rate risk, where an increase in interest rates could lead to a decline in the value of the fund's holdings.
Liquidity risk: The fund may have difficulties in selling its bonds if the market for corporate debt securities is illiquid.
Choosing the correct Credit Risk Fund:
Fund manager's track record: Look at the fund manager's past performance and experience in managing debt funds.
Fund's portfolio diversification: Ensure that the fund has a diversified portfolio across corporate debt securities of varying credit ratings and maturities.
Fund's expense ratio: Check the fund's expense ratio to ensure that it is reasonable compared to similar funds.
Fund's past performance: Look at the fund's historical performance, but keep in mind that past performance is not indicative of future results.
Taxation on Credit Risk Funds in India: Credit Risk Funds are taxed similarly to other debt funds.
Short-term Capital Gains (STCG) - If the holding period is less than 3 years, then STCG tax of 20% with indexation is applicable.
Long-term Capital Gains (LTCG) - If the holding period is more than 3 years, then LTCG tax of 20% without indexation is applicable for gains exceeding Rs. 1 lakh in a financial year.
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