Assess the rating profile

Poring over a debt fund's portfolio will help you very little unless you have a good understanding of rating scales of different rating agencies and can read between the lines. Rating agencies broadly use a rating scale from AAA to D to denote the degree of default risk on long-term corporate debt, and a rating scale from A1 to A4 to grade similar risks for short-term instruments. Bonds with long-term ratings of AAA and AA are deemed quite safe, with a near-zero probability of default within a year. As you go down the rating scale though, the probability of default rises exponentially. A CRISIL ratings study that covered its own experience with corporate issuers from 2005 to 2015 shows that while the incidence of default within one year on its AAA-rated and AA-rated instruments was zero, A-rated securities witnessed default rates of 0.24 per cent, BBB of 0.87 per cent, BB of 3.86 per cent and B of 7.9 per cent. The