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What is the difference between credit risk funds and corporate bond funds?

Ashutosh Gupta explains why it isn't safe to park money meant for SIPs in them

What is the difference between credit risk funds and corporate bond funds? Which one is safer to park funds intended for SIPs?
-Minu Mati

It is the credit quality of the underlying portfolio that creates a material difference between credit risk and corporate bond funds. By their investment mandate, corporate bond funds have to invest at least 80 per cent of their assets in bonds of top quality. In sharp contrast to that, credit risk funds have to necessarily invest at least 65 per cent of their assets in bonds that are less than top rated.

Credit risk funds follow a high-risk, high-return strategy. These funds invest in bonds of issuers that have a relatively weaker financial standing. In times of economic downturn, such issuers are more vulnerable to defaulting on their interest on principal payments. And to compensate for that risk, they have to offer a high-interest rate. So that's why credit risk funds are better placed to offer high returns but of course, that comes with a high risk.

Now coming to the second part of the question related to SIPs, I believe, neither of these two categories is an ideal one to invest your money meant for SIPs. For that, I would suggest funds like liquid funds or maybe an ultra-short-duration fund, which is far safer on all counts - be it credit quality, liquidity or responsiveness to the movement in interest rates.

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