Kallapanna Awade Ichalkaranji Janata Sahakari Bank Ltd.
 

Posted On : August 8,2018

How do credit-risk funds work?

Credit-risk funds are debt funds which have at least 65% of their investments in less than AA-rated paper. They generate high returns by taking higher credit risk and by investing in lower-rated papers. Such companies offer higher interest rates and as and when their ratings move up, they offer a benefit of capital gains. The interest risk in these funds is low as most of them have a lower duration. These funds typically have the potential to give.

What are credit-risk funds ?


Credit-risk funds are debt funds which have at least 65% of their investments in less than AA-rated paper. They generate high returns by taking higher credit risk and by investing in lower-rated papers. Such companies offer higher interest rates and as and when their ratings move up, they offer a benefit of capital gains. The interest risk in these funds is low as most of them have a lower duration. These funds typically have the potential to give.


How do these funds work ?


Credit-risk funds make returns in two ways: one, they earn interest income on the securities they hold. Secondly, since they invest in lower-rated securities, if the rating of a security is upgraded, they have the potential to make capital gains.


What is the tax treatment of these funds ?


Dividends are exempt from tax, but the scheme has to pay a dividend-distribution tax of 28.84%. Returns you earn within three years of investment are subject to short-term capital gains tax. This will be as per your income-tax slab. After three years, you are eligible for longterm capital gains tax at 20% with the benefit of indexation.


How should investors choose a credit-risk fund ?


Credit-risk funds have a higher liquidity risk. If a bond with a lower rating in the portfolio defaults or faces a further downgrade, it may be difficult for the fund manager to exit this holding. Financial planners advise investors to choose large-sized funds in this category. Higher assets give the fund manager better scope to diversify and spread risks. Investors should also look at a fund with a lower expense ratio and make .

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