Nowadays, credit risk funds investing in securities with lower ratings are becoming prominent among investors. They offer investors high returns. India’s First Free Online Financial Advisory, Moneymindz
What are credit risk funds?
Credit risk funds are debt funds having at least 65% of their investments in less than AA-rated paper. They take high credit risk as they invest in lower rate papers, and that’s how they earn higher returns. Companies like these offer higher interest rates and whenever their interest rates increase, they offer a benefit of wealth gains. These funds offer low-interest rates due to the lower duration. Normally these funds can give 2 to 3% higher returns compared to risk-free papers.
The function of credit risk funds
Credit risk funds not only earn interest income on the securities held by them but also make capital gains in the event of the upgradation of security ratings as they invest in lower-rated securities. India’s First Free On call Financial Advisory, Moneymindz
Tax benefits of these funds
The scheme pays a dividend distribution tax of 28.84% despite dividends being exempt from tax. All the returns earned by you within three years of investment is subject to short-term capital gains tax and you will be taxed as per your tax slab. You are eligible for long-term capital gains tax at 20% with indexation benefits after three years.
How do investors need to select credit risk funds?
There is high liquidity risk in credit risk funds. If there is a bond with a lower rating which defaults or further downgrades, the fund manager will find it hard to exit the holding. Investors are advised by financial planners(MoneyMindz) to select large-sized funds in this category. Higher assets give the fund manager better scope to diversify risks. Smart Financial Advisor, Kuber Mindz
Investors ought to look at funds with lower expense ratio and ensure the fund isn’t intensive or having high holdings in any single business group. You ought to select a fund manager and a fund house with optimal experience in managing debt portfolios. Added to that, investors must not hold more than 20% of their debt portfolios in such funds that carry higher risk compared to other debt funds.
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