personal finance

5 things you should know about credit risk mutual funds

1. Credit risk funds are a category of debt mutual funds that invest at least 65% of their portfolio in securities with less than AA rating.

2. These funds have the potential to generate high returns as they take higher credit risk by investing in lower rated paper which give higher interest.

3. If the rating of a security moves up, they offer a benefit of capital gains. However, in case of downgrades there can be a capital loss.

4. Due to nature of the underlying investments, these funds also carry higher liquidity risk and higher risk of default.

5. It is a suitable investment for someone with a medium to long-term time horizon and higher risk appetite.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)


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