Credit risk funds. Should you invest?
Credit risk funds are debt funds that lend not less than 65% of their portfolio in the lower rated instruments (less than AA rated papers). The borrowers have to shell out higher interest charges to compensate for their lower credit rating, which translates into a higher risk for the lender due to an increased possibility of default. Although, these funds lend mostly for short duration. They are still one of the riskiest in the category.
These funds are ideal for an investment horizon of at least 3-5 years. There is a high probability of incurring losses if held for short term.These funds tend to deliver higher returns than Bank Fixed Deposits thereby involving higher risk.
Portfolio with Credit Risk Funds fetches:
• Higher Return : These funds take high risks and invest that money in the low risk instruments and the returns generated are higher as compared to other funds.
• Tax Benefits: These funds are tax-efficient as the Long Term Capital Gains (LTCG) is flat 20% where as if the assessee is in 30% slab still LTCG will be taxable at 20%.
• Extended Supervision: In these funds, fund managers play a very significant role in obtaining remarkable returns. Credit rating alone is not the only basis of decision making. There are various parameters such as the company’s scope of expansion, its potential and business model.
ICICI Prudential Credit Risk Fund is presently giving return of +8.64% p.a.
Kotak Credit Risk Fund is presently giving return of +7.44% p.a
HDFC Credit Risk Fund is presently giving return of +7.55% p.a