Credit-risk funds that invest in securities with lower ratings are gaining popularity among investors as there is a potential for investors to earn double-digit returns.
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 2-3% higher returns compared to risk-free papers.
How do these funds work?