--- title: What is a Credit Risk Fund? canonical_url: https://sanchaykaro.com/what-is-a-credit-risk-fund/ last_updated: 2026-05-12T07:24:27+00:00 plugin_version: 1.2.1 --- # What is a Credit Risk Fund? What is a Credit Risk Fund? – Complete Simple Guide for Beginners (2026) ------------------------------------------------------------------------ Are you looking for a **debt mutual fund** that gives **higher returns than a bank fixed deposit**? A **Credit Risk Fund** could be the right choice for you. This blog explains **what is a Credit Risk Fund** in very simple language. You will also learn how to invest easily using the **Sanchaay Karo app**. --- ### What is a Credit Risk Fund? (Very Simple Definition) A **Credit Risk Fund** is a type of **debt mutual fund** that invests most of its money in **bonds** issued by companies with **lower credit ratings**. According to **SEBI** rules, a **Credit Risk Fund** must invest at least **65% of its total assets** in **corporate bonds** rated **AA and below** (that is, AA+, AA, AA–, A+, A, A–, BBB+, BBB, BBB–, and so on). Think of it like this: When you put money in a **bank fixed deposit**, you lend to one bank. A **Corporate Bond Fund** lends only to the safest, top-rated companies. A **Credit Risk Fund**, on the other hand, lends to **many companies** that are less established but offer **higher interest rates** to attract **investors**. Companies with **lower credit ratings** pay higher interest because they carry a **higher chance of default** compared to top-rated companies. **Credit Risk Funds** take this additional **risk** in exchange for the **potential of higher returns**. As the name suggests, **credit risk** is the chance that the money lent out by the **mutual fund** is not paid back by the borrower. **Credit Risk Funds** are the only **debt fund** category that openly spells out this **risk** in its name. **Important:** A **Credit Risk Fund** is a **debt mutual fund**, not an **equity fund**. It does NOT invest in **company stocks**. It lends money to companies and earns **regular interest income**. The **risk** is higher than other **debt funds** but still much lower than **equity funds**. As of 2026, **Credit Risk Funds** are a well-established category. According to **SEBI's February 2026 circular**, these funds now have a **clearer risk positioning**—**Credit Risk Funds** are meant to have **meaningful lower-rated exposure**, while **Corporate Bond Funds** are for predominantly higher-rated papers. --- ### How Does a Credit Risk Fund Work? (Step-by-Step) **Credit Risk Funds** pool money from many **investors**. A professional **fund manager** then invests that money in **bonds** issued by companies with **lower credit ratings**. Here is a simple example: Suppose you invest ₹10,000 in a **Credit Risk Fund**. The **fund manager** will allocate at least ₹6,500 (65%) to **bonds** rated **AA and below**. The remaining 35% can be in higher-rated **bonds**, government securities, or liquid assets. Your money is now spread across many companies, which gives **diversification** and the chance to earn **higher returns**. The **fund manager** does deep research to identify **bonds** that offer the best **risk-reward balance**. They analyse the **financial health** of companies, evaluate their **repayment capacity**, and actively track **credit quality** and **market conditions**. When a company's **financial position** improves, **credit rating agencies** may upgrade its **bond rating**. This can cause the **bond prices** to rise, benefiting the **fund** through **capital appreciation**. Conversely, a **downgrade** can hurt **returns**. **Credit Risk Funds** also earn **regular interest income** from the **interest payments** of these **bonds**. **Credit Risk Funds** often **diversify** across multiple **issuers**, which significantly reduces the overall **risk**. --- ### Key Features of Credit Risk Funds FeatureWhat It Means**SEBI Mandate of 65%**At least 65% of assets must be in **bonds** rated **AA and below****Higher Yield Potential****Credit Risk Funds** invest in **higher-yielding securities**. With higher **risk** comes better **returns** compared to traditional **debt funds****Open-ended**You can buy or sell units on any business day**Active Fund Management****Fund managers** actively track **credit quality** and **market conditions** to manage **risk****Moderate to High Risk**Considered **high risk** among **debt mutual funds** due to exposure to **lower-rated bonds****Minimum 3-Year Horizon****Credit Risk Funds** have a minimum **investment horizon** of **3 years** to benefit from **long-term performance****Moderate Liquidity**You can **redeem** your investment, but **Credit Risk Funds** may not be as **liquid** as **ultra-short** or **liquid funds**, particularly during **market stress****Credit-Sensitive Returns****Credit Risk Funds** are more sensitive to **credit events** like **upgrades** or **downgrades** than other **debt funds****Diversified Portfolio****Credit Risk Funds** have a **diversified portfolio** across different **sectors**, **maturities**, and **ratings** to reduce overall **risk****Low Correlation****Credit Risk Funds** have a **low correlation** with other **debt funds** and **equity funds**, as they are influenced by different factors[[What is a Flexi Cap Fund?](https://sanchaykaro.com/what-is-a-flexi-cap-fund/)](https://sanchaykaro.com/what-is-a-flexi-cap-fund/)### Benefits of Investing in Credit Risk Funds Here are the main benefits of adding a **Credit Risk Fund** to your **mutual fund portfolio**: BenefitWhy It Matters**Higher Return Potential****Credit Risk Funds** typically deliver **higher returns** than traditional **debt funds** and **bank FDs**. Over the past year, the category average has delivered **10.31% p.a.** returns**Opportunity from Credit Upgrades**When the **financial position** of a company improves, its **bond rating** may be **upgraded**. This can result in a rise in **bond prices**, benefiting the **fund****Professional Credit Selection****Fund managers** do deep research and analysis to pick **bonds** with the best **risk-reward balance****Access to Higher-Yielding Bond Universe****Credit Risk Funds** give you access to **bonds** that individual **investors** may not be able to buy directly**Diversification****Credit Risk Funds** spread your money across multiple **issuers**, **sectors**, and **maturities**, reducing the impact of any single **default****Potential for Better Risk-Adjusted Returns**When managed well, **Credit Risk Funds** can offer attractive **risk-adjusted returns** compared to other **debt fund** categories**Better than Fixed Deposits****Credit Risk Funds** can perform better than **fixed deposits** in stable **credit conditions****Helps Diversify Debt Portfolio**Adding a **Credit Risk Fund** to your **portfolio** helps **diversify** the **debt portion** and reduce overall **portfolio risk****Note:** **Credit Risk Funds** have on average delivered **10.31% p.a.** returns in the last 1 year, with **3-year** and **5-year annualized returns** of **8.76%** and **9.22%** p.a., respectively. In a year when stock markets have been muted, some **Credit Risk Funds** have zoomed more than **20 percent**, delivering better **returns** than many **equity funds**. --- ### Who Should Invest in Credit Risk Funds? (Ideal Investor Profile) **Credit Risk Funds** are **NOT for everyone**. They are perfect for: - **Investors seeking higher returns** within the **debt mutual fund** space. If you want better **returns** than typical **fixed-income** options, a **Credit Risk Fund** may align with your **investment goals** - **Investors with a high risk tolerance** who are comfortable with **moderate to high risk** and **volatility** - **Investors with a medium-term investment horizon** of **3 to 5 years** or more - **Investors looking to diversify their portfolio** beyond traditional **debt funds** and **equity funds** - **Experienced investors** who understand that higher **returns** come with higher **risk** - **Investors who have already built a core portfolio** of safer **debt funds** (like **liquid funds** or **ultra-short duration funds**) and want to add a higher-yielding component - **Investors who can handle short-term NAV fluctuations** without panicking **Who should AVOID Credit Risk Funds?** - **Conservative investors** who cannot tolerate **risk** or **loss of capital** - **Beginners** who are new to **mutual fund investment** (start with **liquid funds**, **ultra-short duration funds**, or **banking and PSU funds** first) - **Investors with a very short-term horizon** (less than 3 years) - **Retirees** who need **capital protection** and **regular income** - **Investors who cannot tolerate any credit events or defaults** As **Value Research** explains: *"Credit risk funds follow a high-risk, high-return strategy. These funds invest in bonds of issuers that have a relatively weaker financial standing. In times of economic downturn, such issuers are more vulnerable to defaulting."* --- ### Credit Risk Fund vs Corporate Bond Fund – What's the Difference? Many **investors** get confused between **Credit Risk Funds** and **Corporate Bond Funds**. Here is a simple comparison based on **SEBI** rules: FeatureCredit Risk FundCorporate Bond Fund**SEBI Mandate**Minimum **65%** in **AA and below rated bonds**Minimum **80%** in **AA+ and above rated bonds****Credit Quality**Lower-rated (**AA and below**)Higher-rated (**AA+ and above**)**Risk Level**HighLow to Moderate**Return Potential**Higher (10%+ in good years)Moderate (7–9%)**Default Risk**Higher chance of **default**Very low chance of **default****Investment Strategy**High-risk, high-return strategySafer, more conservative strategy**Best For**Aggressive **debt fund** investorsConservative **debt fund** investors**Key difference**: It is the **credit quality** of the underlying **portfolio** that creates a material difference between **Credit Risk Funds** and **Corporate Bond Funds**. Both categories are on **diametrically opposite sides** of investing in the **credit category**. **Which one is safer?** **Corporate Bond Funds** are much safer because they invest only in **top-rated bonds**. **Credit Risk Funds** carry higher **risk** but offer higher **return potential**. **Should you park money meant for SIPs in these funds?** According to **Value Research**, neither of these two categories is ideal for money meant for **SIPs**. For that, **liquid funds** or **ultra-short-duration funds** are far safer on all counts—**credit quality**, **liquidity**, and **interest rate risk**. --- ### Top Credit Risk Funds in India (2026) Here are some of the **best Credit Risk Funds** in India based on **AUM** and recent performance: Fund NameAUM (₹ Crore)1-Year Return (%)5-Year Return (%)Expense Ratio (Direct)**DSP Credit Risk Fund**208.6421.97%12.00%0.40%**Aditya Birla Sun Life Credit Risk Fund**1,094.0614.28%10.06%0.80%**Baroda BNP Paribas Credit Risk Fund**199.048.77%10.25%0.85%**ICICI Prudential Credit Risk Fund**5,936.309.91%7.94%0.76%**HDFC Credit Risk Fund**————**HSBC Credit Risk Fund**—17.22% (1Y)8.5% (5Y)—*Data sources: Rupeezy, ET Money (as of March–April 2026)* **Note:** The **DSP Credit Risk Fund** is the best-performing fund in the category, with a **1-year return of 21.97%**. The **Aditya Birla Sun Life Credit Risk Fund** has delivered around **18 percent** on a one-year basis (as of May 2025). **Important:** **Past performance** does not guarantee **future returns**. **Credit Risk Funds** are subject to **market risks**, and **returns** can vary significantly based on **credit conditions** and **fund manager** decisions. Always consult your **financial advisor** before investing. *Disclaimer: Past performance does not guarantee future returns. Please consult your **financial advisor** before investing.* --- ### Risks of Credit Risk Funds (Must Read Before Investing) **Credit Risk Funds** carry **significant risks** that every **investor** must understand: RiskExplanation**Default Risk (Credit Risk)**This is the main **risk**—the chance that a company may **default** on its **interest** or **principal payments**. **Credit Risk Funds** invest in **lower-rated bonds**, which have a higher chance of **default****Liquidity Risk****Lower-rated bonds** can be difficult to sell in times of **market stress**. This can affect the **fund's NAV** and your ability to **redeem** quickly**Interest Rate Risk**When **interest rates** rise, the prices of existing **bonds** fall. This can reduce your **returns****NAV Volatility****NAV** can fall sharply during **credit events** or **downgrades****Credit Downgrade Risk**If a **bond** in the **portfolio** is **downgraded**, its price falls, hurting the **fund's NAV****Fund Manager Risk**Your **returns** depend heavily on the **fund manager's** skill in picking **bonds** with the best **risk-reward balance****Higher Expense Ratio****Credit Risk Funds** have a higher **expense ratio** than other **debt funds** because they incur higher costs for **research**, **analysis**, and **monitoring****Real-world example:** The **Franklin Templeton** episode in 2020, where six **credit risk-oriented debt funds** were wound up, serves as a stark reminder of the **risks** associated with this category. Also, the **IL&FS default** crisis showed that even "AA" and above-rated **portfolios** can face serious challenges. **Abhishek Bisen**, head – fixed income at **Kotak Mutual Fund**, notes: *"Investors may benefit if the lower-rated bonds are upgraded in the future."* However, there is no guarantee of **upgrades**, and **defaults** can and do happen. --- ### Taxation on Credit Risk Funds (Simple Rules for FY 2026-27) **Credit Risk Funds** are treated as **debt mutual funds** for **taxation** purposes. **Capital gains tax** rules are different from **equity funds**. TypeHolding PeriodTax Treatment**Short Term Capital Gains (STCG)**Less than 3 yearsGains added to your **income** and taxed as per your **income tax slab rate****Long Term Capital Gains (LTCG)**3 years or moreGains added to your **income** and taxed as per your **income tax slab rate****Important:** As per the **Union Budget 2023**, the **indexation** benefit for **debt mutual funds** was **removed** for investments made on or after **April 1, 2023**. For such investments, all **gains** are added to your **income** and taxed as per your **slab rate**, regardless of the holding period. **Key tax rules for FY 2026-27:** - If you invested **before April 1, 2023**, you may still be eligible for the old **tax regime** (20% with **indexation** after 3 years) - **Dividends** (IDCW) are added to your **income** and taxed as per your **slab rate** - The **fund house** deducts **10% TDS** under Section 194K if your **dividend** from a **fund house** exceeds **₹5,000** in a financial year **Example:** If you fall in the **30% tax bracket** and earn a **capital gain** of ₹10,000 from a **Credit Risk Fund**, you will pay **₹3,000** as **tax** (30% of ₹10,000), regardless of how long you held the investment. --- ### How to Invest in Credit Risk Funds Using Sanchaay Karo App Now that you understand what a **Credit Risk Fund** is, the next step is **investing**. The easiest way is through the **Sanchaay Karo app**. **Sanchaay Karo** is a simple, trusted, and **SEBI-registered** mutual fund investment platform. It helps you invest in **top Credit Risk Funds** and hundreds of other funds with just a few taps. [](https://apirrabbit.com/api/v1/master/LandingPage?arn=ARN-301757)#### Why Choose Sanchaay Karo App for Credit Risk Fund Investment? - **Smart Goal-Based Investing**: Tell the app your goal (retirement, child's education, buying a house). It suggests the right **Credit Risk Fund** based on your **risk profile** and **investment horizon** - **Simple Dashboard**: See all your investments in one place – no confusion or clutter. Track **NAV**, **returns**, and **portfolio** in real time - **Quick KYC**: Complete your **KYC online** using Aadhaar and PAN in just 5 minutes. **Paperless KYC** is fully supported - **Start SIP from ₹500**: You don't need a lot of money. Start small with a **Systematic Investment Plan (SIP)** . You can do **monthly SIP**, **weekly SIP**, or **daily SIP** - **Track Performance**: Get regular updates on how your **Credit Risk Fund** is performing against its **benchmark** (like CRISIL Credit Risk Debt B-II Index) - **No Hidden Charges**: Transparent and low-cost. You can choose between **regular plan** and **direct plan** options. **Direct plans** have lower **expense ratios** - **Stay On Track**: Get timely reminders so your **SIPs** never stop - **Access to All AMCs**: Invest in **DSP Credit Risk Fund**, **Aditya Birla Sun Life Credit Risk Fund**, **ICICI Prudential Credit Risk Fund**, **HSBC Credit Risk Fund**, and many more #### Steps to Invest in Credit Risk Funds (Very Easy) 1. **Download** the **Sanchaay Karo app** from Google Play Store or Apple App Store 2. **Sign up** using your mobile number and email 3. **Complete KYC** – upload **PAN card** and Aadhaar (fully paperless). You can also do **video KYC** if needed 4. **Search** for "Credit Risk Fund" or let the app recommend one based on your **financial goals** 5. **Compare** different **Credit Risk Funds** based on **returns**, **expense ratio**, **exit load**, **credit rating exposure**, and **fund manager** track record 6. **Choose** between **lumpsum** (one-time) or **monthly SIP** investment. For **Credit Risk Funds**, **SIP** is recommended to reduce **timing risk** 7. **Pay** using **UPI**, net banking, or debit card 8. **Done!** Your investment starts growing. You will receive regular statements 👉 **\[Click Here to Download Sanchaay Karo App Now\]** () --- ### Important Tips Before Investing in Credit Risk Funds Before you invest in a **Credit Risk Fund**, keep these points in mind: 1. **Understand the Investment Horizon**: **Credit Risk Funds** are best for **3 to 5 years**. Do not invest for less than 3 years, as you may lose money due to **credit events** or **interest rate movements**. 2. **Check Credit Rating Exposure**: Ensure the **fund** invests primarily in **AA and below rated instruments** as per **SEBI** mandate, but also check the distribution across **AA+, AA, AA–, A+, A, A–**, etc. Higher exposure to lower-rated **bonds** means higher **risk**. 3. **Check the Fund Manager's Track Record**: Look for consistent performance across different **credit cycles**. A good **fund manager** with experience in **credit risk** is crucial. 4. **Compare Expense Ratios**: **Direct plans** have much lower **expense ratios** (often 0.40–0.80%) than **regular plans** (often 1.00–2.00%). Over time, this difference matters. 5. **Use SIP for Disciplined Investing**: **Systematic Investment Plans (SIPs)** reduce the impact of **market volatility** and encourage disciplined investing. 6. **Don't Chase Past Returns**: A **fund** that gave 21% returns last year may not repeat it. Look for consistency over 3-5 years. 7. **Limit Allocation to 5-10% of Debt Portfolio**: **Credit Risk Funds** should be a **small portion** of your overall **debt portfolio**. Most of your **debt allocation** should be in safer categories like **liquid funds**, **ultra-short duration funds**, **banking and PSU funds**, or **corporate bond funds**. 8. **Check Exit Load**: Some **Credit Risk Funds** have an **exit load** for redemptions within a certain period. For example, the **Bank of India Credit Risk Fund** charges an **exit load** of **4%** if redeemed within 12 months, **3%** if redeemed after 12 months but within 24 months, and **2%** if redeemed after 24 months but within 36 months. Always check before investing. 9. **Monitor Credit Ratings**: Keep track of the **credit ratings** of the **bonds** in the **fund's portfolio**. A **credit downgrade** can significantly impact the **fund's NAV**. 10. **Avoid for Emergency Funds or Short-Term Goals**: **Credit Risk Funds** are **not suitable** for parking **emergency funds** or money needed within 3 years. --- ### Frequently Asked Questions (FAQs) About Credit Risk Funds **Q1: Are Credit Risk Funds safe?** A: No **mutual fund** is 100% safe. **Credit Risk Funds** have **high risk** among **debt funds** due to exposure to **lower-rated bonds**. They carry **default risk**, **liquidity risk**, and **interest rate risk**. However, they are still less risky than **equity funds**. **Q2: Can I lose money in Credit Risk Funds?** A: Yes, you can lose money in the **short term**, especially if a **bond** in the **portfolio** **defaults** or gets **downgraded**. **NAV** can fall sharply during **credit events**. However, if you hold for **3 to 5 years** and the **credit environment** remains stable, the chance of **loss** is lower. **Q3: What is the minimum SIP amount for Credit Risk Funds?** A: Most **Credit Risk Funds** allow **SIP** starting from **₹500** per month. Through the **Sanchaay Karo app**, you can start with as little as **₹500**. **Q4: How much returns can I expect from Credit Risk Funds?** A: Historically, **Credit Risk Funds** have delivered **8–10% annual returns** over 3-year periods. In good years, some funds have delivered **over 20%** returns. However, **returns** are not guaranteed and can vary significantly. **Q5: What is the difference between Credit Risk Funds and Corporate Bond Funds?** A: **Credit Risk Funds** invest at least **65%** in **AA and below rated bonds**. **Corporate Bond Funds** invest at least **80%** in **AA+ and above rated bonds**. **Credit Risk Funds** have higher **risk** but higher **return potential**. **Corporate Bond Funds** are safer. **Q6: Are Credit Risk Funds better than Fixed Deposits?** A: **Credit Risk Funds** often offer **higher returns** than **FDs**, but they come with **higher risk**. **FDs** offer **guaranteed returns** (subject to bank limits), while **mutual funds** do not. **Credit Risk Funds** also have **no lock-in period** (except possible **exit load**), while **FDs** may charge a penalty for early withdrawal. **Q7: How are Credit Risk Funds taxed?** A: For investments made **after April 1, 2023**, all **gains** are added to your **income** and taxed as per your **slab rate**, regardless of the holding period. For investments made **before April 1, 2023**, if held for **3 years or more**, **gains** may be taxed at **20% after indexation**. **Q8: Can NRIs invest in Credit Risk Funds?** A: Yes, **NRIs** can invest in **Credit Risk Funds** through **Sanchaay Karo app** using their NRE/NRO account. **Q9: What is the expense ratio of Credit Risk Funds?** A: **Expense ratios** for **direct plans** typically range from **0.40% to 0.80%** (e.g., DSP Credit Risk Fund has 0.40%). **Regular plans** have higher **expense ratios** (often 1.00–2.00%). **Credit Risk Funds** have higher **expense ratios** than other **debt funds** due to higher **research** and **monitoring** costs. **Q10: What is the exit load for Credit Risk Funds?** A: **Exit load** varies by **fund**. Some **Credit Risk Funds** have **nil exit load**, while others charge a **sliding exit load**. For example, the **Bank of India Credit Risk Fund** charges **4%** if redeemed within 12 months, **3%** if redeemed after 12 months but within 24 months, and **2%** if redeemed after 24 months but within 36 months. Always check the **Scheme Information Document (SID)** before investing. --- ### Final Words – Should You Invest in a Credit Risk Fund? **Yes**, if you: - Are an **experienced investor** who understands **credit risk** and **market cycles** - Have a **high risk tolerance** and can handle **NAV fluctuations** and potential **defaults** - Have a **medium-term investment horizon** of **3 to 5 years** or more - Already have a **core portfolio** of safer **debt funds** (like **liquid funds**, **ultra-short duration funds**, or **banking and PSU funds**) - Are looking for **higher returns** within the **debt mutual fund** space - Want to **diversify** your **portfolio** beyond traditional **debt funds** - Are willing to accept that **higher returns** come with **higher risk** **No**, if you: - Are a **conservative investor** who cannot tolerate **risk** or **loss of capital** - Are a **beginner** with no experience in **mutual fund investment** - Need your money back within **3 years** - Cannot handle **credit events** or **defaults** - Are looking for **guaranteed returns** – **FDs** may be more suitable - Are a **retiree** needing **capital protection** and **regular income** **Credit Risk Funds** are powerful tools for **enhancing returns** within the **debt mutual fund** space – but they come with **significant risks**. They have delivered impressive **returns** in recent years, with some funds zooming over **20%** in a single year. However, the **Franklin Templeton** episode and the **IL&FS default** crisis serve as stark reminders of what can go wrong. The golden rule for **Credit Risk Fund** investing: **Keep them as a small portion of your debt portfolio (5-10%), not the core. Have a minimum 3-year horizon. Use SIP to reduce timing risk. And never chase past returns.** As **SEBI's 2026 rules** make clear, **Credit Risk Funds** are now more clearly defined and regulated than ever before. They offer a **high-risk, high-return** strategy for **investors** who understand and accept the **risks**. So if you are an **experienced investor** with **high risk tolerance** and a **medium-term horizon**, start small. Use **SIP** to reduce **timing risk**. And always keep your **core portfolio** strong with safer **debt funds**. Start your **investment journey** today with the **Sanchaay Karo app**. 👉 **\[Click Here to Download Sanchaay Karo App Now\]** () --- **Disclaimer:** This blog is for **educational purposes** only. **Mutual fund investments** are subject to **market risks**. **Credit Risk Funds** carry **high risk** due to **default risk**, **liquidity risk**, and **interest rate risk**. Please read all **scheme related documents** carefully, including the **Scheme Information Document (SID)** and **Statement of Additional Information (SAI)** , and consult your **financial advisor** before investing. **Past performance** does not guarantee **future returns**. The **Sanchaay Karo app** is a platform for mutual fund investments; all investments are subject to **market risk**.