Credit Risk Funds are debt mutual funds that invest mainly in lower-rated corporate bonds to earn higher interest income. By lending to companies with relatively lower credit ratings, these funds aim to generate better returns than traditional debt funds, while accepting a higher level of risk. They are designed for investors who can tolerate short-term fluctuations in exchange for higher yield potential.

These funds focus on identifying undervalued or improving credit opportunities in the corporate bond market. Fund managers actively assess company fundamentals, repayment capacity, and economic conditions to manage risk. Returns can improve significantly if bond issuers experience credit upgrades, leading to both interest income and price appreciation.

1. Major allocation to lower-rated corporate debt instruments
2. Actively managed portfolios with continuous credit monitoring
3. Higher yield potential compared to conservative debt funds
4. Diversification across multiple issuers to manage default risk
5. Market-linked returns with moderate to high volatility

Credit risk funds are ideal for investors who understand credit markets, can tolerate risk, and are looking to maximise returns from debt investments over the medium term.

Credit risk funds suit investors seeking enhanced income from debt investments and who are comfortable taking calculated risks. They are often chosen by investors aiming to boost overall portfolio returns while maintaining exposure to fixed-income assets.

1. Potential for higher returns due to elevated interest rates
2. Possibility of capital gains from credit rating upgrades
3. Professional credit evaluation and risk management
4. Adds return-enhancing diversification to a debt portfolio.

These funds carry a higher chance of volatility due to credit downgrades or defaults. Liquidity risk may arise during stressed market conditions, and returns are not guaranteed. They are best suited for investors with a medium-term horizon and higher risk appetite.

Credit risk funds follow standard debt mutual fund taxation. Capital gains are taxed as per the investor’s applicable income tax slab, irrespective of the holding period. Any income received is also taxed according to prevailing tax rules.