All you need to know about credit risk

All you need to know about Credit Risk All kinds of investments entail some amount of risk. Credit risk, however, takes the center stage in fixed-income investment.

Markets News: All kinds of investments entail some amount of risk.

Credit risk, however, takes the center stage in fixed-income investment.

One of the most popular debt instruments are the debt funds. Before

investing in debt funds, you need to be aware of the manner in which you may entail credit risk.

What is Credit risk in Mutual Funds?

Debt funds make money by way of interest earned on the underlying assets i.e. debentures, bonds, treasury bills and the likes. Apart from that, the underlying security is obliged to repay the principal upon maturity. Debt funds are exposed to credit risk when a bond/debenture defaults on its interest/principal repayment obligations. So, in a way, investing in debt funds exposes you to credit risk indirectly.

Various rating agencies like CRISIL and ICRA assign credit ratings to debt securities which indicate their extent of creditworthiness. A higher rating indicates a lower probability of default by the issuer which issued the underlying security.

→ Know More About Mutual Funds ← These credit ratings are dynamic in nature. The ratings change as per the financial performance of the underlying security. In mutual funds, the fund manager looks at the credit rating of a security before investing in it.

He/she may go for AAA-rated or below rated security as per the investment mandate of the fund. In debt funds arena, you may find funds which have no credit risk i.e. GILT funds to funds which have high credit risk.

How does credit risk affect fund NAV? The Net Asset Value (NAV) of a debt fund is immensely affected by behavior of the...read more

→News Source:BS/Business Standard←