The first step towards investing your hard-earned money is to select the right investment instrument. And a primary element that is common to all instruments is credit risk. In terms of Mutual Funds (MF), credit risk entails that the issuer of the specific scheme is unable to pay the promised amount as interest.

So, if you are wondering how to pick and invest in a credit risk mutual fund, this article is for you. But first, let’s understand what a credit risk mutual fund is.

What are credit risk mutual funds?

A credit risk mutual fund is a kind of debt MF that invests a significant portion (at least 65%) in low-rated securities. As a result, the risk of investing in such mutual funds is pretty high. Now the question arises, why would you invest in low-rated securities? The answer is simple – higher returns!

Simply put, securities with low credit ratings tend to offer higher rates of interest. And the aim of a credit risk MF, just like all mutual funds, is to maximise returns for the investor. Further, there are mainly 2 ways a credit risk fund generates returns – through interest earned on the investment or in the form of capital gains.

Since credit risk mutual funds have a higher risk factor, they are not suitable for conservative and risk-averse investors.

How to pick the right credit risk mutual fund

When it comes down to choosing a credit risk mutual fund, there are multiple factors that you must consider. These factors include:

Risk appetite and financial goals

First off, before you invest in any fund, identify your financial goals and risk tolerance. Having a clear picture of your goals will help you determine whether you want a long-term investment. Moreover, knowing your risk appetite is crucial because this is a high-risk instrument.

Additional Read: Asset Classes That Performed Well This Season

Size of the fund

Next up, consider the size of the fund as funds with a larger corpus are in a better position to spread out the risk. Also, a large fund can help mitigate the risk by diversifying across various securities with different credit ratings and interest rates.

Portfolio diversification

The golden rule of investment is to never keep all your eggs in a single basket. The same rule applies to your credit risk fund. According to financial advisors, choosing a credit risk MF that is diversified and not concentrated on a particular business group or sector is the wise move.

Reputation of the fund manager

Last but not least, the experience and expertise of the fund manager are of great importance. Why? Because the performance of a fund is highly dependent on the fund manager. Thus, look for a manager who has dealt with credit risk funds before and has an impeccable track record.

Additional Read: Understanding the Credit Quality of Debt Funds

To sum up

Before zeroing in and investing your wealth in a credit risk mutual fund, go through each of these factors thoroughly. Finally, if you are looking for a tool that can help you compare different funds and ease your investment journey, download Tata Capital’s Moneyfy app today. It allows you to set goals and invest in the best instruments to gain optimum gains.

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