Best Credit Risk Funds - Total Guide 2025
The credit risk funds are attracting the attention of Indian investors seeking more returns in the debt fund category in 2025. As the debt markets are dynamic and the environments alter, these funds can be considered as the transition between safety and income, and hence attractive when one is ready to take calculated risks. This paper will discuss the existing best credit risk funds, their mechanism, their suitability and how you can determine which one fits into your investment objectives.
What is a Credit Risk Fund and Why do you need one?
A credit risk fund is a debt mutual fund, which tends to invest more in lower rated debt bonds than in high rated safer bonds. They carry a minor risk but they are expected to provide better interest revenue (yields) than more ordinary debt funds.
The credit risk funds usually have their portfolio that contains a minimum of 65 percent of bonds that are rated AA or lower. The reasoning behind this choice is, these bonds are more prone to default, but their interest rates (coupons) are generally appealing which increases the potential returns of the fund.
Key Features or Highlights
- Invests primarily lower rated (less than AAA) corporate bonds.
- Above average yield compared to pure liquid and gilt funds.
- Apposite to moderate and high risk investors.
- In short term holding, redemption may have exit loads.
Advantages and Disadvantages of Credit Risk Funds.
Advantages
- Greater returns potential than bank FDs and conventional debt funds.
- Spread in industries and issuers, lessening the risk of default.
- Recommended fits to those who want to increase fixed income income without a complete shift to equities.
Disadvantages
- The returns may be sharply decreased by credit events (defaults or downgrades).
- Sensitive to the rating changes of underlying bonds.
- Not the best with super conservative investors.
Did you know?
Particularly, credit risk funds were highly volatile between 2018-2020 because of big defaults (such as ILFS and DHFL). The present day portfolios are more concerned with strong credit choice after the regulatory reforms.
What are the Future of Credit Risk Funds in 2025?
In 2025, credit risk funds have become more selective. Prior to picking the corporate bonds, fund managers undertake deep due diligence to avoid the effects of individual company defaults. Majority of funds guarantee exposure to markets such as power, finance, and manufacture but restrict risky investments.
The mean time of these funds that are modified is one to three years. The earnings will be governed by the interest rates in the economy and the credit spread of the bonds.
Key Features or Highlights
- Altered period between 1 and 3 years represents moderate interest rate risk.
- Serious credit analysis procedure has become the norm.
- Bonds Spreads of government bonds are usually 150-300 basis points.
Pros and Cons
Pros
- Is able to provide returns of 1 to 2 percent above the usual debt funds in good markets.
- Short- medium term time horizon invests responds to fluctuations of interest rates.
Cons
- The returns may be subject to change in case there is an increase in credit spreads or deterioration of the economic circumstances.
- Reduced liquidity in underlying security when there is market stress.
Expert insight:
According to S. Mehra, a seasoned debt fund manager, the Indian credit risk funds in 2025 will be more dependent on the various levels of credit analysis, which would decrease the concentration of the single issuers.
What are the top credit risk funds in India 2025?
A number of schemes have been able to control the risk and provide appealing returns. When investing, research fund manager reputation, portfolio transparency and previous performances over full 3-5 year periods.
Top 5 Credit Risk Funds 2025 Comparison Table.
| Fund Name | 3 yr CAGR (%) | AUM (Cr) | Top Rated Bonds (%) | Expense Ratio (%) | Min SIP ([?]) |
|---|---|---|---|---|---|
| Axis Credit Risk Fund | 8.6 | 4,700 | 75 | 1.15 | 100 |
| SBI Credit Risk Fund | 8.2 | 3,200 | 72 | 1.08 | 500 |
| ICICI Pru Credit Risk* | 7.9 | 3,850 | 73 | 1.12 | 100 |
| Kotak Credit Risk Fund | 7.7 | 2,950 | 70 | 1.10 | 500 |
| HDFC Credit Risk Debt | 7.4 | 3,100 | 74 | 0.99 | 100 |
The information presented is current and as of March 2025; check the latest factsheet or disclosures made by AMFI.
Key Features or Highlights
- Exposure to single issuers is low in all the major funds.
- The minimum investment requirement is as low as [?]100 in the case of SIPs.
- Portfolios that had been stress-tested after credit events in 2020.
Pros and Cons
Pros
- Best funds perform consistently across several periods in the market.
- Professional credit analysis Access to lower rated bond market that has high yield.
Cons
- Previous performance is not a sure thing in future.
- Minor differences in cost in the expense ratios of funds.
People Also Ask
P: Do credit risk funds remain safe in 2025?
A: They are now safer than they were as they are better regulated and they are also more diversified at the fund level though more risks arise in comparison to the top rated debt funds.
Did you know?
In 2020, the SEBI (Securities and Exchange Board of India) directives compelled funds to enhance disclosure and reduce exposures of default risks on credit risk funds.
What Are the Returns You Can get on Credit risk funds?
Over the past three years, three percent to 8.5 percent after taxes have been delivered by the credit risk funds. These figures are however not fixed and can vary up or down depending on:
- India interest rate situation.
- Movement of credit spread in corporate bond market.
- Whether or not fund manager can pick the appropriate papers.
The slow inflation management of RBI has seen credit spreads stabilize in 2024 and early 2025 and helped these funds to yield steady returns. Short term blips may be a result of the industry-related events or company downgrades.
Key Features or Highlights
- In a rising economy, the returns can exceed the traditional FDs and gold by 1-2 percent.
- Under Income from Other Sources taxable as per slab in case redeemed prior to 3 years.
- Long term capital gains (LTCG) tax applicable in case of holding over 36 months.
Pros and Cons
Pros
- Consistent source of income to individuals who do not want to deal directly with equity risks.
- Better investment option in 2-4 year terms.
Cons
- Income can be high and low; one should be patient.
- Increased vulnerability during the times of economic declines.
People Also Ask
Q: Which is superior credit risk fund or corporate bond fund?
A: Credit risk funds may provide more but risky returns. Corporate bond funds concentrate more on rater papers that are more secure and tend to be risk averse.
Expert insight:
According to the advice of S.K. Rawat, mutual fund advisor [2025], the total risk of fund allocated towards credit risk must not exceed 15- 20 percent of the debt portfolio of a prudent investor.
The Question of Selecting the Right Credit Risk Fund in your Portfolio?
Credit risk funds are not created equal. This is how to select the best in your profile:
- Consider 3-year and 5-year rolling returns, and not the 1 year performance.
- Limit concentration to one issuer or to one sector (do not have too concentrated funds)
- Check portfolio sheet monthly, credit rating upgrade, and downtgrades.
- Prefer the old fund houses that have credit research teams that have been tested.
- Excess costs may wipe out low-return-year gains, so judge expense ratio.
Key Features or Highlights
- The most dependable funds have a reduced volatility in monthly NAVs.
- Minimum period to redeem to avoid exit load is normally 12 months.
- Frequent disclosure of portfolio by SEBI-mandate empowers the investors.
Pros and Cons
Pros
- Opportunity to overcome the inflation in case of the prudent choice.
- Automated diversification and routine assessment by fund manager.
Cons
- The negative surprises are possible due to selection error when the credit calls of fund become erroneous.
- It is recommended that investor actively monitors.
People Also Ask
Q: Is SIP applicable in credit risk fund?
A: Yes, S.I.P.s can even even out risks when invested over minimum three years, however make sure to monitor changes in credit profiles over the term of your investment.
Did you know?
Other investors combine credit risk funds with liquid funds to offset risk and retain some portion of the portfolio in flexibility in case of sudden demands.
What to Know about Taxation and Exit Loads.
Your taxation affects your take-home returns. The credit risk funds are classified as taxes as debt funds:
- Gains less than 36 months added to income taxed as per slab.
- Long term gains (others held over 36 months) taxed at 20 percent, indexed.
- Majority charge exit load of 1 percent in case redeemed within a year.
Prudent investors design exits in such a way that they reduce short term taxation and expenditure.
Key Features or Highlights
- The indexation advantage is capable of reducing tax on long term gains at a large rate.
- There are funds that have zero exit load within 12 or 18 months.
- Taxation regulations can be updated, redemption before redeeming.
Pros and Cons
Pros
- Good tax regime on long term investments.
- Upfront visibility of exit load.
Cons
- Increased tax should you require a withdrawal on a short term basis.
- A little complicated to the first time MF investors.
People Also Ask
Q: What is the taxation on credit risk fund returns in the year, 2025?
A: Taxation of short term (less than 36 months) gains is on per slab whereas long term gains (>36 months) are taxed at 20 percent with indexation benefit.
Expert insight:
The indexation can be planned with three years of redemption that can increase the actual post tax returns to 6.5 percent or higher depending on market shocks.
Investing in Credit risk funds in 2025.
These are the best practices that new and seasoned investors seeking credit risk funds should consider:
- These funds are to be considered as a 2-4 year hold as opposed to short term parking.
- Limit one of your total debt investments.
- Favour well parented funds, those with low churn and that which have demonstrated the capacity to cope with downgrades.
- Be attentive to routine portfolio monitoring and rating.
Credit risk funds may fit into growth-oriented fixed income allocation by young working professionals. The quantity that ought to be allocated should be sparse and is to be given more priority to capital safety to retirees, or risk averse investors.
Key Features or Highlights
- SIP route assists in establishing exposure at a slow pace and averages credit spread changes.
- Review asset allocation bi-annually as macro conditions vary.
- The risks can be contained by monitoring exposures on the sector.
Pros and Cons
Pros
- Will fit investors interested in greater yield in a declining interest rate market.
- Ability to increase or decrease allocation with a variation in risk appetite.
Cons
- Disposed towards sharp downslopes during nationwide credit events.
- Not so suitable to people requiring guaranteed returns.
People Also Ask
Q: Who will not want credit risk funds?
A: Those investors who require their capital to be protected, or those whose investment horizon is very short (less than 1 year) ought to avoid credit risk funds.
Did you know?
Certain funds give updates to investors after each material credit event or RBI policy in order to keep unitholders advised of the riskiness.
TLDR or Quick Recap
- There is a higher risk in credit risk funds as it takes a bet in lower rated corporate bonds with better returns.
- Safety in 2025 is better than it was although still not risk-free due to professional management and stricter control.
- Leading funds in India have 7.4-8.6 percent 3-year CAGR, although this can be different.
- Select funds on credit selection, previous performance and concentration in single issuers that is low.
- Taxation regulations include those of debt funds; the plan should hold funds at least 3 years to be indexed.
- Perfectly suitable to moderately risk averse investors who possess 2-4 years time horizon.
People Also Ask
Q: What is the risk rating of credit risk funds at present?
M: Moderate to high; risk has been alleviated since 2020, however, by better regulatory oversight.
Q: What is the frequency of changes in the portfolio reported by credit risk funds?
A: Monthly, according to SEBI requirements, and without delay in case of any significant rating exercise.
Q: Could credit risk funds have negative returns?
A: Yes, NAVs can fall drastically during extreme credit events or during downgrades. This risk is contained in a diversified strategy of your debt portfolio.
Sources
- AMFI is an Indian association of mutual funds.
- Regulations of SEBI Mutual Fund.
- Fund factsheets (March 2025)
