Credit Risk — Mutual Fund Term Explained

The risk that a bond issuer defaults or is downgraded, causing the fund's NAV to fall sharply. Higher-yield bonds carry more credit risk.

Credit risk is the risk that a bond issuer fails to make payments or repay principal. Credit risk funds invest in lower-rated (AA and below) bonds for higher yield but accept higher default risk.

Notable Indian incidents: IL&FS (2018), DHFL (2019), Franklin Templeton (2020) — all caused sudden sharp NAV falls.

Related terms

• Debt Fund — A mutual fund investing in fixed income securities — bonds, G-Secs, commercial paper. Lower risk than equity but also lower returns.
• YTM (Yield to Maturity) — The annualised return if a bond is held to maturity. Used as a proxy for expected future returns of a debt fund.
• Gilt Fund — A debt fund investing only in Government Securities. Zero credit risk since backed by the government, but significant interest rate risk.

Browse the full mutual fund glossary, or see this concept in action in the fund screener.