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.