How do credit risk funds differ from corporate bond funds?

By PriyaSahu

Credit risk funds and corporate bond funds are both debt mutual funds, but they invest in different types of bonds. Credit risk funds aim for higher returns by investing in lower-rated bonds (below AA), while corporate bond funds focus on safety by investing mostly in high-rated bonds (AA+ and above). So, credit risk funds carry higher risk and potentially higher reward, while corporate bond funds offer lower risk and more stable returns.



What Are Credit Risk Funds?

Credit risk funds are debt mutual funds that invest at least 65% of their money in low-rated corporate bonds (rated below AA). These funds take more credit risk by lending to companies with lower credit ratings in exchange for higher interest (coupon) payments. Investors choose these funds hoping to earn better returns than traditional debt funds.

However, the higher the risk, the higher the chance that the issuing company may default or delay payments. These funds are suitable for investors who can take moderate to high risk and hold their investment for a longer period.



What Are Corporate Bond Funds?

Corporate bond funds are debt mutual funds that invest at least 80% of their portfolio in high-rated corporate bonds (rated AA+ and above). These funds prioritize safety over return. Because they invest in companies with strong credit profiles, they are considered more stable and carry lower credit risk.

Corporate bond funds are ideal for conservative investors who want relatively safe returns and lower volatility. These are suitable for short- to medium-term financial goals.



Key Differences Between Credit Risk Funds and Corporate Bond Funds

FactorCredit Risk FundsCorporate Bond Funds
Investment TypeLow-rated bonds (below AA)High-rated bonds (AA+ and above)
Risk LevelModerate to HighLow
Return PotentialHigherModerate
Ideal ForAggressive investorsConservative investors


Which One Should You Choose?

The right choice depends on your risk profile and financial goals. If you're comfortable with some risk and want higher returns, credit risk funds may suit you. But if safety is your priority and you want predictable returns, corporate bond funds are a better option.

It’s always wise to diversify your portfolio and consult a financial advisor before investing, especially in debt mutual funds with different risk levels.



Both credit risk and corporate bond funds offer unique benefits. By understanding their differences, you can align your debt fund investments with your risk appetite and long-term financial plans. Always review the credit quality of the fund portfolio and check the track record before investing.



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