Credit-risk funds are a type of debt funds that invest approximately 65% of the investment corpus in less than AA-rated paper. By taking greater credit risk and investing in lower-rated documents, they produce high returns. Such firms offer greater interest rates and offer a capital gain advantage as and when their ratings move up. The risk of interest in these funds is small because most of them are of a lower duration. Typically, these funds can return 2-3 percent greater than risk-free investments.
Credit-risk funds make returns on the securities they hold in two ways: first, they receive interest income. Second, since they invest in lower-rated securities, they can create capital gains if the security rating is upgraded.
Investors with a higher appetite for risk in the fixed income space should look at credit risk funds.
The minimum investment varies from scheme to scheme. It could range between Rs.100/ – to Rs.5,000/ -.
> If an investor has made an investment in a debt mutual fund and withdraws the amount before 3 years of investment, Short Term Capital Gains Tax would be levied, as per the income tax slab of the investor.
> If an investor withdraws the investment including capital gains post 3 years of investment, 20% Long Term Capital Gains Tax of 20% is levied, with the benefit of indexation.