Credit risk is the risk associated with the failure of a borrower to repay back the borrowed amount. In other words, it means when a person who took a loan is unable to pay back the same within the stipulated time. Credit risk is often compensated with higher cash flows in terms of returns. A bond with a high credit risk will have a low credit rating and high coupon rates. The interest payments by the borrowers of debt is a reward for the risk taken by the lender or investors.u003cbr/u003eLenders often assess the borrower's credit risk based on the credit history, ability to repay, amount of loan or principal, conditions for the loan and the collateral for the loan. Huge corporates have dedicated teams to analyze the credit risk of borrowers.u003cbr/u003eHowever, it gets difficult for individual investors to assess credit risk. In this case, they can follow the rating of various u003ca href=u0022https://scripbox.com/pf/credit-rating/u0022 target=u0022_blanku0022 rel=u0022noreferrer noopeneru0022u003ecredit ratingu003c/au003e agencies. Any rating of BBB, A, AA, AAA are of the highest credit quality. The risk of default is very less. Ratings below BBB rating have the highest credit risk. The default rate for these is often high. Hence securities with these bonds have higher coupon rates than securities which don't have them.

What is the difference between corporate bond fund and credit risk fund?

Both corporate bond funds and credit risk funds are similar in their investment in bonds. However, corporate bond funds invest the majority of the asset in high-quality bonds that earn interest during the course of the investment. While credit risk funds invest the majority in low-quality credit funds with a higher level of risk caused by the weak financial status of the company. The investment strategy of credit risk fund is to generate high returns by investing in high risk bonds. The risk involved in credit risk bonds is w.r.t. the default in repaying the principal amount. To compensate such a risk credit risk fund attempts to deliver a higher return to its investors.

Is credit risk fund a debt fund?

Yes, credit risk funds are debt fund that invest in high risk debt instruments. They aim to generate higher returns by investing in securities that pay a higher yield than high rated funds. Credit risk funds should invest at least 65% of the assets in papers having ratings below AA+. In comparison to other risk-free debt funds, these funds can generate higher returns.

What is interest rate risk in debt funds?

Interest rate risk is the risk associated with the fixed income earning securities such as bonds, bills, etc. An interest rate risk is the probability that the interest rate will reduce the value of the bond or other the fixed income earning debt instruments. If the interest rate rises, the market price of the bonds reduces making it less attractive for the investors. A debt fund invests in fixed income earning securities. Since, such fixed income earning securities are subject to interest rate risk, debt funds are also associated with interest rate risk. Such a price sensitivity of an instrument to its interest rate is called duration. The higher the duration of the instrument, higher is the sensitivity to the interest rate fluctuations.

How is credit risk calculated?

Credit risk is calculated based on many factors like credit history, ability to repay, amount of loan or principal, conditions for the loan and the collateral for the loan. All factors are analyzed together to come with a credit ranking that determines the level of risk. Various u003ca href=u0022https://scripbox.com/pf/credit-rating/u0022u003ecredit ratingu003c/au003e agencies offer such a credit rating. Any rating of BBB, A, AA, AAA are of the highest credit quality. The risk of default is very less. Ratings below BBB rating have the highest credit risk. The default rate for these is often high. Hence securities with these bonds have higher coupon rates than securities which don’t have them.

Are credit risk funds safe?

Credit risk funds are high-risk funds. There are chances that the ratings of these funds might downgrade. Since credit risk mutual funds invest in low credit rating securities, they come with a default risk attached to them. Hence, it is not suitable to all investors. No doubt credit risk funds carry a higher risk. Hence, these funds are suitable for investors who understand the high risk associated with it. Due to the high credit risk (default risk) in the category, experts recommend investors to stay away from this category of funds. Even for investors who can absorb the market volatility and have a high-risk tolerance, due to Covid-19 this isn’t the right time to invest in these funds.

What are the risks of debt funds?

The risk of investing in debt funds are interest rate risk and credit risk. An interest rate risk is the probability that the interest rate will reduce the value of the bond or other the fixed income earning debt instruments. If the interest rate rises, the market price of the bonds reduces making it less attractive for the investors. A debt fund invests in fixed income earning securities. Since, such fixed income earning securities are subject to interest rate risk, debt funds are also associated with interest rate risk Credit risk is also known as the default risk. As the name suggests, it is the risk or default i.e. failure to repay the principal amount or the interest accrued. is the risk of the issuer. Various credit rating agencies offer such a credit rating. Any rating of BBB, A, AA, AAA are of the highest credit quality. The risk of default is very less. Ratings below BBB rating have the highest credit risk. The default rate for these is often high. Hence securities with these bonds have higher coupon rates than securities which don’t have them.

How is credit risk managed?

Credit risk is primarily managed by applying credit evaluation for the borrower to determine the ability to repay and the level of risk associated with the credit given. Banks manage credit risk during the course of the credit by holding collaterals or form of guarantee from the lender to cover the value of the credit and reserves the right to take ownership of the guarantee in case the borrower was unable to pay.

Best Credit Risk Mutual Funds to Invest in 2025

Fund name	AUM	1Y CAGR	3Y CAGR	Till Date CAGR
SBI Credit Risk Fund Direct (G)	₹ 2,247 Cr	9.6%	8.5%	8.7%
ICICI Prudential Credit Risk Fund Direct (G)	₹ 6,138 Cr	10%	8.6%	8.9%
HDFC Credit Risk Debt Fund Direct (G)	₹ 7,180 Cr	9.3%	8.1%	8.8%
Aditya Birla Sun Life Credit Risk Fund Direct (G)	₹ 985 Cr	17.9%	11.9%	9.1%
Axis Credit Risk Fund Direct (G)	₹ 363 Cr	9.6%	8.3%	8.3%
Bank of India Credit Risk Fund Direct (G)	₹ 109 Cr	5.9%	6%	2.1%
Baroda BNP Paribas Credit Risk Fund Direct (G)	₹ 173 Cr	9.8%	8.5%	8.9%
Bandhan Credit Risk Fund Direct (G)	₹ 285 Cr	9.3%	7.7%	7.2%
Kotak Credit Risk Fund Direct (G)	₹ 709 Cr	8.7%	7.7%	8.2%
Nippon India Credit Risk Fund Direct (G)	₹ 999 Cr	10.1%	8.7%	7.5%
DSP Credit Risk Fund Direct (G)	₹ 207 Cr	23.1%	15.2%	9.1%
Invesco India Credit Risk Fund Direct (G)	₹ 146 Cr	11.8%	10.4%	7.3%
UTI Credit Risk Fund Direct (G)	₹ 285 Cr	9.3%	7.8%	5.3%
HSBC Credit Risk Fund Direct (G)	₹ 669 Cr	22.4%	11.9%	8.3%

Top 10 Credit Risk Mutual Funds to invest in 2025

Below are the credit risk mutual funds in india:

1. SBI Credit Risk Fund Direct (G)

SBI Credit Risk Fund Direct (G) is a Debt fund that has delivered a 1 Year return of 9.6%, a 3 Years return of 8.5% and a 5 Years return of 8.1%. The fund has an expense ratio of 0.9% and an AUM of ₹2248 crores as of 2025-05-11.The minimum SIP investment is ₹1000 and the minimum lump sum investment is ₹5000. The fund allocates 089.93% to debt and 7.20% to other assets.

2. ICICI Prudential Credit Risk Fund Direct (G)

ICICI Prudential Credit Risk Fund Direct (G) is a Debt fund that has delivered a 1 Year return of 10.0%, a 3 Years return of 8.6% and a 5 Years return of 8.4%. The fund has an expense ratio of 0.8% and an AUM of ₹6138 crores as of 2025-05-11.The minimum SIP investment is ₹1000 and the minimum lump sum investment is ₹5000. The fund allocates 086.77% to debt and 5.19% to other assets.

3. HDFC Credit Risk Debt Fund Direct (G)

HDFC Credit Risk Debt Fund Direct (G) is a Debt fund that has delivered a 1 Year return of 9.3%, a 3 Years return of 8.1% and a 5 Years return of 8.4%. The fund has an expense ratio of 1.0% and an AUM of ₹7180 crores as of 2025-05-11. It was Launched on 2014-03-25. The minimum SIP investment is ₹1000 and the minimum lump sum investment is ₹5000. The fund allocates 088.63% to debt and 6.69% to other assets.

4. Aditya Birla Sun Life Credit Risk Fund Direct (G)

Aditya Birla Sun Life Credit Risk Fund Direct (G) is a Debt fund that has delivered a 1 Year return of 17.9%, a 3 Years return of 11.9% and a 5 Years return of 10.8%. The fund has an expense ratio of 0.7% and an AUM of ₹985 crores as of 2025-05-11. It was Launched on 2015-04-17. The minimum SIP investment is ₹1000 and the minimum lump sum investment is ₹5000. The fund allocates 089.97% to debt and 2.38% to other assets.

5. Axis Credit Risk Fund Direct (G)

Axis Credit Risk Fund Direct (G) is a Debt fund that has delivered a 1 Year return of 9.6%, a 3 Years return of 8.3% and a 5 Years return of 8.0%. The fund has an expense ratio of 0.8% and an AUM of ₹363 crores as of 2025-05-11. It was Launched on 2014-07-15. The minimum SIP investment is ₹1000 and the minimum lump sum investment is ₹5000. The fund allocates 096.53% to debt and 2.45% to other assets.

6. Bank of India Credit Risk Fund Direct (G)

Bank of India Credit Risk Fund Direct (G) is a Debt fund that has delivered a 1 Year return of 5.9%, a 3 Years return of 6.0% and a 5 Years return of 27.4%. The fund has an expense ratio of 1.1% and an AUM of ₹110 crores as of 2025-05-11. It was Launched on 2015-02-27. The minimum SIP investment is ₹1000 and the minimum lump sum investment is ₹5000. The fund allocates 077.64% to debt and 22.36% to other assets.

7. Baroda BNP Paribas Credit Risk Fund Direct (G)

Baroda BNP Paribas Credit Risk Fund Direct (G) is a Debt fund that has delivered a 1 Year return of 9.8%, a 3 Years return of 8.5% and a 5 Years return of 10.6%. The fund has an expense ratio of 0.8% and an AUM of ₹174 crores as of 2025-05-11. It was Launched on 2015-01-23. The minimum SIP investment is ₹1000 and the minimum lump sum investment is ₹5000. The fund allocates 088.73% to debt and 7.72% to other assets.

8. Bandhan Credit Risk Fund Direct (G)

Bandhan Credit Risk Fund Direct (G) is a Debt fund that has delivered a 1 Year return of 9.3%, a 3 Years return of 7.7% and a 5 Years return of 7.0%. The fund has an expense ratio of 0.7% and an AUM of ₹286 crores as of 2025-05-11. It was Launched on 2017-03-03. The minimum SIP investment is ₹1000 and the minimum lump sum investment is ₹5000. The fund allocates 096.81% to debt and 3.19% to other assets.

9. Kotak Credit Risk Fund Direct (G)

Kotak Credit Risk Fund Direct (G) is a Debt fund that has delivered a 1 Year return of 8.7%, a 3 Years return of 7.7% and a 5 Years return of 7.2%. The fund has an expense ratio of 0.8% and an AUM of ₹709 crores as of 2025-05-11.The minimum SIP investment is ₹1000 and the minimum lump sum investment is ₹5000. The fund allocates 087.32% to debt and 3.22% to other assets.

10. Nippon India Credit Risk Fund Direct (G)

Nippon India Credit Risk Fund Direct (G) is a Debt fund that has delivered a 1 Year return of 10.1%, a 3 Years return of 8.7% and a 5 Years return of 9.4%. The fund has an expense ratio of 0.7% and an AUM of ₹1000 crores as of 2025-05-11.The minimum SIP investment is ₹1000 and the minimum lump sum investment is ₹5000. The fund allocates 092.81% to debt and 7.19% to other assets.

Best Credit Risk Funds

List of Credit Risk Mutual Funds in 2025