Credit Risk Mutual Funds

A credit risk fund lends mainly to companies whose bonds are rated AA or lower. SEBI requires at least 65% in such company bonds, and AA+ bonds do not count towards it.

A mutual fund is a pool of money from many people, invested by a professional manager under SEBI rules. In a debt fund, that pool is lent to borrowers through bonds and similar paper.

SEBI describes the category as "An open ended debt scheme predominantly investing in AA and below rated corporate bonds (excluding AA+ rated corporate bonds)". Put simply, most of the money goes to company bonds rated below AAA and AA+.

The 65% is counted in a particular way:

• At least 10% of the fund's net assets, its total value, must sit in liquid assets.
• These include cash, government securities (G-secs) and treasury bills.
• SEBI applies the 65% only to the remaining 90%.
• So bonds rated AA or lower must make up at least 58.5% of the whole fund.

No more than 20% of net assets may go to one sector. Scheme names may not use "Words/ phrases that highlight/ emphasize only the return aspect of the scheme". A name has to match its category instead.

There is no lock-in, a period during which you cannot sell.

Each step down means less certainty of being repaid on time, until D, which means default.

A credit rating is a rating agency's opinion of the odds that a borrower repays in full and on time. Credit risk, the risk this category is named after, is the chance that a borrower pays late or does not pay back.

SEBI's meanings, from AA down:

• AA: a "high degree of safety", with "very low credit risk".
• A: an "adequate" degree of safety and low credit risk.
• BBB: a "moderate" degree of safety and moderate credit risk.
• BB, B and C: a moderate, high and very high risk of default. A default is a missed payment of interest or of the amount lent.
• D: "in default or are expected to be in default soon".

A plus or minus sign, as in AA- or A+, shows where a bond stands within its grade.

SEBI lets mutual funds buy only investment-grade bonds, those rated BBB- or higher. So a credit risk fund cannot buy BB paper. It can end up holding a lower-rated bond only if one it owns is downgraded.

One rule is looser here. A credit risk fund may lend up to 10% of the fund to one borrower. With board and trustee approval, that rises to 12%. Other debt funds face tighter caps for AA and A paper.

Ratings are opinions, and SEBI's investor website says they "can change quickly".

Lower ratings push up two of SEBI's three debt scores at once: credit risk and liquidity risk. Most listed credit risk funds read Moderately High on 29 September 2026; some read High and a few Moderate.

The riskometer is the risk label SEBI makes every fund show, on six levels from Low to Very High, checked every month. For a debt fund, SEBI scores the whole portfolio on three things:

• Credit risk, which scores higher as ratings fall.
• Interest-rate risk, the chance that a change in rates changes the value of the bonds held. SEBI scores it by Macaulay duration, the average time in years until a bond's payments come back, weighted by what each is worth today.
• Liquidity risk, the chance the fund cannot sell a holding quickly at a fair price. Lower ratings score higher here too.

SEBI averages the three, unless the liquidity score is higher. Then that score counts alone.

Take plain AA bonds that trade on a stock exchange, with no guarantee or option attached. AA scores 3 on credit and 4 on liquidity. At a duration of half a year to a year, scored 2, the three average exactly 3. Liquidity's 4 is higher, so it counts: Moderately High. If the same bonds are not listed on an exchange, liquidity scores 5, and the level becomes High. These are workings of the formula, not of any fund.

Every debt fund also picks a cell on SEBI's Potential Risk Class (PRC) grid, a cap on its duration and credit risk. SEBI's rules mean a credit risk fund can never sit in the lowest credit-risk column. The short duration funds guide explains the grid.

The fund house may split the bond off into a segregated portfolio, a separate pot of its own, once the trustees approve. This is allowed after a downgrade below investment grade, or when unrated paper actually misses a payment.

The trustees are a separate company that holds the fund's assets for investors and makes sure the fund house obeys SEBI.

Splitting is optional, and the scheme's rulebook must allow it. While the trustees decide, buying and selling units pauses for one business day at most. If the split goes ahead:

• Everyone holding units on the day of the downgrade or default gets the same number of segregated units.
• From then on, selling your main units pays the main portfolio's NAV, the price of one unit.
• Segregated units cannot be redeemed, or sold back to the fund. They must be listed on a stock exchange within 10 business days.
• Anything later recovered is paid out at once, in proportion to your segregated units.
• No investment and advisory fee may be charged on them.

Their number is shown under the scheme's name for at least 3 years after full recovery or write-off. A few credit risk funds still carry one from an earlier downgrade or default.

At least once a month, the fund house must also stress-test the fund: check how credit, liquidity and interest-rate shocks would hit its NAV. The results go to the trustees and SEBI, not to investors.

If a downgrade or default causes a sharp fall in a fund you hold, Koshex talks you through it before you redeem.

Each follows a different SEBI rule: two are defined by credit rating, one by duration.

• Credit risk funds: a 65% minimum in company bonds rated AA or lower, AA+ excluded. SEBI sets no duration band.
• Corporate bond funds: an 80% minimum in company bonds rated AA+ or higher, the other side of the same rating line.
• Medium duration funds: a portfolio Macaulay duration of 3 to 4 years and no minimum rating.

Take the riskometer readings from 29 September 2026. Corporate bond funds on the list mostly read Moderate. More than half the listed medium duration funds read Moderately High. Some credit risk funds read High, a level no listed fund in the other two showed.

Koshex suggests 3 years or more for a credit risk fund. For a corporate bond fund we suggest 1 to 3 years or more. For a medium duration fund, 3 to 4 years or more.

One kind of money does not suit this category: a hospital deposit you might need at short notice. Money from a sale can take up to 3 working days to reach you. SEBI allows same-day payouts only in overnight and liquid schemes. A default could also leave part of your money in segregated units, which cannot be redeemed.

A loss on units bought on or after 1 April 2023 is a short-term capital loss. A gain on those units is taxed at your slab rate, however long you held them.

That comes from section 76 of the Income-tax Act, 2025. A fund with more than 65% in debt and money market instruments is a Specified Mutual Fund, and this category qualifies. Your slab rate is the income-tax rate for your bracket.

Suppose you bought units in 2024 and sell them in September 2026 for ₹43,000 less than you paid. This is an assumed loss, not a forecast.

• It is a short-term capital loss, because the units were bought after 1 April 2023.
• Say that in the same tax year you sold equity fund units at a short-term gain of ₹43,000.
• For a fund with at least 65% in Indian listed shares, that gain is taxed at 20%.
• Setting the loss against it cuts the tax by ₹8,600, plus ₹344 of cess, a 4% charge on the tax. You pay ₹8,944 less, assuming no surcharge.
• With no gain to absorb it, the loss carries forward for up to eight tax years. That needs your return filed by the due date.
• It can never be set against salary.

Surcharge is an extra charge on the tax once total income passes ₹50 lakh.

Units bought before 1 April 2023 are taxed differently. Held 24 months or less, the gain is taxed at slab rate. Held longer, it is taxed at 12.5% without indexation, meaning no inflation adjustment to your cost.

IDCW means payouts from the fund's income or gains, taxed at slab rate. Once your IDCW from one fund house tops ₹10,000 in a tax year, 10% TDS, tax deducted at source, applies to the whole amount. No TDS applies when a resident redeems units.

Look at each fund's riskometer level before its return. There are 13 listed credit risk funds, holding ₹22,001 Cr between them. Of the 13, 13 have a 3-year record and are ranked on 3-year return and counted in the averages.

• PRC cell. It is printed near the scheme name and shows the most credit risk the fund may take.
• Segregated portfolios. Shown under the scheme's name.
• Holdings. Company bonds made up most of these funds' portfolios in August 2026. Cash and government securities took smaller parts.
• 3-year CAGR. CAGR is the average yearly growth rate over a period, as if growth were even each year. Over funds with a 3-year record, the simple average is 8.8%. It tells you about the past only.
• AUM. Assets under management: the current total value of the money the fund manages.
• Expense ratio. The fund's yearly fee, shown as a percentage of your money and taken out of its value.
• Exit load. A fee some funds charge if you sell within a set time after buying. SEBI does not set one for credit risk funds, but some charge one, for a year or more after you invest. Check the scheme document before you invest.

Koshex is a distributor: a registered intermediary, with AMFI registration ARN-154632, that helps you buy and manage funds. What we offer is the regular plan, the version of a fund you buy through a distributor. Over time we review your holdings and let you know if a fund's risk level or category changes.