What are Credit Risk Mutual Fund Scheme?

Introduction

Credit risk Mutual Fund Scheme are a category of debt mutual fund scheme that primarily invest in lower-rated corporate bonds. These scheme carry a higher risk due to the possibility of default by the bond issuer but offer relatively better returns.

What is Credit Risk in Mutual Fund Scheme?

Credit risk refers to the possibility that the issuer of a bond may default on interest or principal payments. Credit risk Scheme invest in corporate bonds that are rated below the highest credit ratings, meaning they carry more probability of default but also provide better yields to compensate for this risk.

How Do Credit Risk Mutual Fund Scheme Work?

This scheme allocates at least 65% of their assets to corporate bonds rated AA or below. Fund managers aim to generate returns by investing in lower-rated securities, which tend to offer better interest rates than government or AAA-rated corporate bonds. The performance of these scheme depends on the creditworthiness of the bond issuers and overall market conditions. (You are recommended to seek advice from financial advisor before you take any/refrain from any action)

Benefits of Credit Risk Mutual Fund Scheme

  • Diversification: Investing in a variety of corporate bonds helps spread risk.
  • Professional Management: Fund managers actively monitor the credit quality of the investments and adjust the portfolio as needed.

Risks Associated with Credit Risk Mutual Fund Scheme

  • Credit Risk: If a bond issuer defaults, it can impact the scheme’s NAV (Net Asset Value).
  • Liquidity Risk: Some lower-rated bonds may not have enough buyers in the market, making it difficult to sell them at the desired price.
  • Interest Rate Risk: Rising interest rates can negatively impact bond prices and scheme performance.

Who Should Invest in Credit Risk Mutual Fund Scheme?

  • Investors with a higher risk appetite looking for better returns than traditional debt schemes. (You are recommended to seek advice from financial advisor based on your risk taking appetite and investment objective).
  • Those with a medium to long-term investment horizon who can withstand market fluctuations.
  • Investors seeking diversification in their debt portfolio with exposure to corporate bonds.

Conclusion

Credit risk mutual fund schemes can be a suitable option for investors willing to take on additional risk for relatively better returns. However, they require careful assessment of market conditions and scheme performance. Understanding the risks and investment strategy is crucial before committing funds to these investments.

Additional links:

What is a Mutual Fund? - Beginner's Guide to Investing

AMFI - Introduction to Mutual Funds

Know everything about SIP

Let’s Learn How to Invest in Securities Market

AMFI - SEBI Categorization of Mutual Fund Schemes

FAQ Section

What are Credit Risk Mutual Fund Scheme?

Credit Risk Mutual Fund Scheme are a category of debt mutual fund scheme that invests predominantly in lower-rated corporate bonds, specifically those rated AA and below. These scheme aim to earn relatively better returns by taking on additional credit risk associated with these lower-rated securities.  (You are recommended to seek advice from financial advisor before you take any/refrain from any action)
 

How do Credit Risk Mutual Fund Scheme work?

These scheme allocate at least 65% of their assets to corporate bonds rated AA or below. Fund managers select securities that offer higher interest rates due to their lower credit ratings, aiming to enhance returns while managing the associated risks. 
 

Who should invest in Credit Risk Mutual Fund Scheme?

Investors with a higher risk appetite seeking possibly better returns than traditional debt schemes, and those with a medium to long-term investment horizon who can withstand market fluctuations, may consider investing in Credit Risk scheme. (You are recommended to seek advice from financial advisor before you take any/refrain from any action)
 

What are the benefits of investing in Credit Risk Mutual Fund Scheme?

  • Relatively Better Returns: These scheme have the ability  to outperform traditional debt schemes by investing in lower-rated bonds that offer higher interest rates.
  • Diversification: They provide exposure to a variety of corporate bonds, helping to diversify an investment portfolio.
  • Professional Management: Experienced fund managers actively monitor and adjust the portfolio to optimize returns while managing risks.
     

What risks are associated with Credit Risk Mutual Fund Scheme?

  • Credit Risk: The possibility of default by bond issuers can negatively impact the fund's Net Asset Value (NAV).
  • Liquidity Risk: Lower-rated bonds may be harder to sell quickly without incurring a loss, affecting the scheme's liquidity.
  • Interest Rate Risk: Rising interest rates can lead to a decrease in bond prices, adversely affecting scheme performance. 
     

How are Credit Risk Mutual Fund Scheme taxed?

If held for less than 36 months, returns are taxed as per the investor's income tax slab (Short-Term Capital Gains Tax). For holdings longer than 36 months, returns are taxed at 20% with indexation benefits (Long-Term Capital Gains Tax). (Please note that the same is subject to change, based on updated tax legislations. You are recommended to seek advice from tax advisor.)
 

What should investors consider before investing in Credit Risk Mutual Fund Scheme?

  • Risk Tolerance: Assess your ability to handle potential losses due to defaults or downgrades. (You are recommended to seek advice from your financial advisor for better understanding towards your risk appetite and financial goals.)
  • Investment Horizon: This scheme are more suitable for medium to long-term investments to mitigate short-term volatility.
  • Scheme Performance: Review the scheme's historical performance and the fund manager's expertise in handling credit risks.
     

How can one invest in Credit Risk Mutual Fund Scheme?

Investors can invest through mutual fund houses directly or online investment platforms by completing the necessary KYC (Know Your Customer) requirements and other applicable regulatory requirements and selecting a suitable scheme based on their risk profile and investment goals. (You are recommended to seek advice from financial advisor before you take any/refrain from any action)
 

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Visit https://www.hdfcfund.com/information/key-know-how to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website (www.sebi.gov.in/intermediaries.html). For any queries, complaints & grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints directly with the AMCs. If they are not satisfied with the resolutions given by AMCs, they may raise complaint through the SCORES portal on https://scores.sebi.gov.in/scores-home/. SCORES portal facilitates investors to lodge complaint online with SEBI and subsequently view its status. In case the investor is not satisfied with the resolution of the complaints raised directly with the AMCs or through the SCORES portal, they may file any complaint on the Smart ODR on https://smartodr.in/login.

The information is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY

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