Definition.
A credit rating is a quantitative assessment of a specific debt instrument, most commonly a bond that has been issued by a company.
Every bond transaction has two counterparties to a deal – the borrower (or the company) and the lender (usually a bank)..
Credit quality is one of the key criteria used to judge the investment quality of a mutual fund or bond fund.
As the term implies, credit quality tells investors about the creditworthiness or default risk of a bond or bond portfolio.
The credit quality of a company or security might also be known as its "bond rating.".
Definition.
A credit rating is a quantitative assessment of a specific debt instrument, most commonly a bond that has been issued by a company.
Every bond transaction has two counterparties to a deal – the borrower (or the company) and the lender (usually a bank)..
What Is Credit Risk? Credit risk is the probability of a financial loss resulting from a borrower's failure to repay a loan.
Essentially, credit risk refers to the risk that a lender may not receive the owed principal and interest, which results in an interruption of cash flows and increased costs for collection..
Liquidity risk refers to the difficulty to redeem an investment without incurring a loss in the value of the instrument.
It can also occur when a seller is unable to find a buyer for the security.
In mutual funds, like ELSS, the lock-in period may result in liquidity risk.
Nothing can be done during the lock-in period..
All funds carry some level of risk.
With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value.
Dividends or interest payments may also change as market conditions change..
All funds carry some level of risk.
With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value.
Dividends or interest payments may also change as market conditions change..
Credit-risk funds are a type of debt funds that invest approx 65% of the investment corpus in less than AA-rated paper.
By taking greater credit risk and investing in lower-rated documents, they produce high returns.
Such firms offer greater interest rates and offer a capital gain advantage as and when their ratings move up.
The risk of interest in.
Credit risk funds are associated with higher liquidity risk.
If a bond with a reduced portfolio rating fails or faces another downgrade, exiting this holding may be hard for the fund manager.
In this category, financial planners advise investors to select large-scale funds.
They require that money market fund managers only invest in debt securities that have short-term maturities and present minimal credit risk.
SEC regulations require money market funds can only hold debt securities with maturities of 397 days or less and the overall fund must maintain a weighted average maturity of 60 days or less.
Credit-risk funds make returns on the securities they hold in two ways: first, they receive interest income.
Second, since they invest in lower-rated securities, they can create capital gains if the security rating is upgraded.
Credit risk funds are associated with higher liquidity risk.
If a bond with a reduced portfolio rating fails or faces another downgrade, exiting this holding may be hard for the fund manager.
In this category, financial planners advise investors to select large-scale funds.
Higher assets give more scope for diversifying and spreading risks to the f.
It is quite easy to invest in Credit Risk mutual funds on ET Money.
Here are the steps that you have to follow.
Head to Mutual Funds sections and choose the Credit Risk fund you want to invest in.
Click on invest and choose the amount and mode of investment (SIP or Lumpsum) .
Dividends are exempt from tax, but a dividend distribution tax of 28.84% must be paid by the scheme.
Returns you earn are subject to short-term capital gains tax within three years of investment.
This will be per your income tax slab.
After three years, with the advantage of indexing, you are eligible for long-term capital gains tax at 20 percent.
Despite being a debt fund, credit risk funds come with reasonable risks.
For example, the lower-rated papers have also known to be downgraded to expectations sometimes.
Investors should remember that these funds feature frequent rise and fall–so this is not for the weak-hearted.
Investors looking for a steady income and wanting to minimize the risk.
