Credit risk funds are a category of debt mutual funds investing in less than AA-rated papers at least 65% of their portfolio. Credit risk funds are open-ended debt schemes investing in under the highest-rated corporate bonds, according to the Sebi concept. This means that by taking on higher credit risk, these schemes can produce high returns. As their ratings move up, low-rated papers generate high returns. Nonetheless, as we have seen lately, there are also incentives for downgrades and defaults in these articles. Credit-risk funds make returns on the bonds they hold in two ways: first, they gain interest income. Second, when they invest in lower-rated bonds, they make gains when a security score is improved. The credit risk funds therefore yield high returns if the low-rated paper calls go right. The opposite scenario, though, is also possible.

Credit Risk Fund : These mutual funds are investing in lower-grade bonds. Higher rating; decrease the default possibility. Lower rated bonds offer higher interest rates, however, and therefore returns.
Risk : Moderate