Credit Risk Funds

Credit-risk funds are a kind of debt funds which have at least 65% of their funds in less than AA-rated paper. They produce high yields by taking higher credit risk and by investing in lower-rated papers. Such organizations propose higher interest rates and as and when their ratings move up, they offer a benefit of capital gains. The risk of losing interest in these funds is low because of its short duration. These funds typically have the capacity to give 2-3% more returns compared to risk-free papers. Due to nature of the underlying investments; these funds also carry higher liquidity risk and higher risk of evasion.

The funds works in following ways: 

• Firstly, they earn interest income on the securities they hold. 
• Secondly, since it is lower-rated securities, they have the capability to make capital gains.

Investors prefer-ability

Credit-risk funds have a high liquidity risk. If a bond with a lower rating in the portfolio defaults or goes through a further downgrade, it may be difficult for the fund manager to exit this holding. Professionals suggest investors to select large-sized funds in this category. Investors should also look at a fund with a lower expense ratio and make sure the portfolio is not focused or has high holdings in any single corporate group. Finally, investors should not hold more than 20% of their debt portfolios in such funds, which carry higher risk compared to other debt funds.

Thank You

Regards

Jyotsana Juhi 

Kautilya 

IBS Mumbai