Definition
Credit Risk Fund
A credit risk fund invests at least 65% in lower-rated corporate bonds (AA and below) to earn higher yields in exchange for taking on default risk.
SEBI defines credit risk funds as holding a minimum 65% in instruments rated below the highest grade. The strategy is to pick up extra yield from companies that are weaker but, in the manager's view, unlikely to default.
These funds were tested during the IL&FS and DHFL defaults of 2018-19, when several saw sharp falls and redemption pressure. They suit only investors who understand and accept that a single default can dent the NAV meaningfully.
Related terms
- Corporate Bond FundA corporate bond fund is a debt mutual fund that, under SEBI rules, invests at least 80% of its assets in high-quality corporate bonds rated AA+ and above — aiming for yields above government paper while keeping credit risk low.
- Credit RatingA credit rating is an independent agency's assessment of a borrower's ability to repay debt, ranging from AAA (safest) down to D (default).
- Yield to Maturity (YTM)Yield to maturity is the total annualised return an investor would earn on a bond if held to maturity, accounting for its price, coupons and the gain or loss to face value.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.