Corporate Bond Funds and Credit Risk Funds: Key Differences
Blog by Aliceblue News Desk
13 November 2026
10 minutes
Corporate bond funds must keep at least 80% of their assets in corporate bonds rated AA+ and above. Credit risk funds must keep at least 65% in corporate bonds rated AA and below, excluding AA+. The first carries lower default risk and moderate returns. The second pays more interest but can lose money if a borrower fails to repay. Neither guarantees returns.
Why did your debt fund’s NAV drop when you never bought a single share? Often the reason is the type of company the fund has lent to.
Corporate bond funds and credit risk funds both lend to companies. Corporate bond funds lend mostly to strong ones. Credit risk funds lend to weaker ones in return for higher interest. This guide covers how each works, what can go wrong, how they are taxed, and who each one suits.
What Are Corporate Bond Funds and Credit Risk Funds?
Both are debt mutual funds. A debt fund collects money from many investors and lends it by buying bonds. A bond is a loan to a company. The company pays you interest and returns your money on a fixed date.
SEBI, India’s market regulator, defines each category:
- A corporate bond fund keeps at least 80% of its assets in corporate bonds rated AA+ and above.
- A credit risk fund keeps at least 65% in corporate bonds rated AA and below. AA+ bonds are excluded from this limit.
Weaker companies have to offer more interest to attract lenders. That is why credit risk funds often show higher yields. Yield is the yearly interest a fund’s bonds earn, shown as a percentage.
How Do Corporate Bond Funds and Credit Risk Funds Work?
- You invest, and the fund house (AMC) gives you units at the current NAV. NAV is the price of one unit, worked out at the end of each business day.
- The fund manager studies companies and their credit ratings, then buys bonds that fit the category rules.
- The bonds pay interest regularly. This interest makes up most of your return.
- Bond prices move every day. When market interest rates rise, older bonds lose value. When rates fall, they gain.
- If a company’s rating drops or it misses a payment, the fund marks that bond down. Your NAV falls with it.
- When you sell, you get that day’s NAV. Your profit or loss is the gap from the NAV at which you bought.
Two risks sit behind this. Credit risk is the chance a company does not repay. Interest rate risk is the chance bond prices fall when market rates rise. Maturity affects the second one. Maturity is the time left until a bond is repaid, and a longer maturity means bigger price swings when rates move.
What Do Credit Ratings Mean?
Rating agencies such as CRISIL, ICRA, and CARE grade each bond on how likely the company is to repay.
Rating | Meaning | Usually held by |
AAA | Highest safety | Corporate bond funds |
AA+ | Very strong | Corporate bond funds |
AA | Strong, with some risk | Credit risk funds |
A and below | Higher chance of default | Credit risk funds |
Think of two people asking to borrow from you. One has a steady government job and offers modest interest. The other is starting a business and offers much more. You are more likely to see your money again from the first.
A lower rating does not mean the company has already failed. AA and several lower bands are still investment grade, so “lower rated” is a relative label.
Example With Numbers
These numbers are made up to show the idea. They do not come from any real fund. Rohan puts ₹1,00,000 in each fund for one year.
Corporate bond fund | Credit risk fund | |
Interest earned | 7.5% = ₹7,500 | 9.5% = ₹9,500 |
One company, 15% of the fund, has its bond marked down by 40% | None | 15% × 40% = 6% = ₹6,000 loss |
Net gain before costs and tax | ₹7,500 | ₹3,500 |
In a normal year, the credit risk fund earns ₹2,000 more. After this one problem, it earns ₹4,000 less. Even if ₹2,000 of the loss is recovered later, the credit risk fund is still at ₹5,500, behind the ₹7,500.
This has happened in India. In April 2020, Franklin Templeton’s trustees decided to wind up six debt schemes, including Franklin India Credit Risk Fund, because markets had become illiquid during COVID. Investors could no longer redeem or buy units in these schemes after the cut-off time on 23 April 2020. Franklin Templeton reports it has since distributed ₹27,548.21 crore, which is 109.25% of the assets on that date. That took years, and investors could not access their money during that time.
Key Features of Corporate Bond Funds and Credit Risk Funds
- Both follow SEBI category rules, so you can compare them on equal terms.
- The NAV changes every business day.
- Interest on bonds drives most of the return.
- The AMC publishes holdings and ratings in a monthly factsheet, a report listing what the fund owns.
- You can invest a lump sum or use a SIP, which is a fixed amount invested on a set date each month.
- Returns are not guaranteed, and your principal can fall.
Advantages
Corporate bond funds suit medium term goals. They usually offer more than a savings account, and most holdings carry high ratings. One fund gives you exposure to many borrowers, which you could not manage on your own with ₹10,000.
Credit risk funds can pay more when conditions are good. If a weak company’s rating improves, its bond price can rise and the fund gains. Some experienced investors add them in small amounts to a portfolio that already holds safer debt.
Are Corporate Bond Funds Safe? Risks and Limitations
Corporate bond funds are safer than credit risk funds, but they are not risk free. The NAV can fall if rates rise or a holding is downgraded. A downgrade means a company’s rating drops, which lowers its bond price even without a default.
The money risks are:
- A default can wipe out interest and part of your principal.
- Rising rates or a downgrade can lower the NAV.
- Lower rated bonds can be hard to sell in a stressed market, as the 2020 Franklin Templeton episode showed.
- Too much money in one company means a single problem hurts more.
Behaviour causes losses too. Some investors pick the fund with the highest yield without reading the ratings behind it. Others sell after one bad week and turn a temporary dip into a real loss. A fund that yields much more than its peers is usually taking more risk somewhere, so look at its holdings.
Are Credit Risk Funds Good for Beginners?
Most beginners are better off starting with a higher rated fund. A default in a credit risk fund hits the NAV directly, and lower rated bonds are harder to sell when markets are under stress.
Experienced investors sometimes hold a credit risk fund as a small slice of their debt money. They have read the portfolio, understand ratings, and accept that part of their money could be lost.
How Are Corporate Bond Funds and Credit Risk Funds Taxed?
Under Section 50AA of the Income Tax Act, a unit of a specified mutual fund bought on or after 1 April 2023 is treated as a short-term capital asset. A specified mutual fund includes one that invests more than 65% of its money in debt and money market instruments, so both of these categories generally fall in. Short-term gains from these units are added to your income and taxed at your slab rate, regardless of the holding period. Budget 2026 made no change to this treatment.
Units bought before 1 April 2023 follow a different rule, so check the purchase date on your statement. Tax law changes often, so confirm with a tax adviser before you invest.
Corporate Bond Funds vs Credit Risk Funds vs FDs
Corporate bond fund | Credit risk fund | Bank FD | |
Lends to | Strong companies | Weaker companies | The bank |
Default risk | Low | Higher | Very low |
Can the value fall? | Yes, a little | Yes, more | Value fixed at booking |
Return | Varies, check factsheet | Varies, usually higher | Fixed at booking |
Suggested holding | 3 years or more | 3 years or more | As chosen |
Fits | Medium-term goals | Small, informed allocation | Money you cannot risk |
If you cannot accept any fall in value, an FD fits better. Banks may charge a penalty for early withdrawal, so check the terms. Funds may earn more but come with price swings.
How to Choose Between the Two
- Look at the rating split in the factsheet. A corporate bond fund should be mostly AAA and AA+.
- Check the average maturity. A shorter one means less sensitivity to rate changes.
- See the top five holdings. If they make up most of the fund, one problem hurts more.
- Compare the expense ratio, the yearly fee the fund charges. Direct plans charge less than regular plans.
- Read the exit load, a fee for selling too soon.
- Check the riskometer on the scheme document. It is a dial showing how risky SEBI considers the fund.
Tips for Beginners
- Read the factsheet before you invest, especially the rating split.
- Keep emergency money in a liquid fund, which holds very short-term debt.
- Keep any credit risk fund to a small share of your debt money.
- Plan to hold for three years or more.
- Write down why you bought the fund. It helps you avoid selling in a panic.
- Review the portfolio once or twice a year.
Mistakes to Avoid
- Choosing by return alone. A high return usually comes with higher risk, so compare ratings too.
- Treating a debt fund like an FD. Its value can fall, so read the riskometer first.
- Investing for a few months. Short periods bring more NAV swings.
- Selling after one bad week. Find out why the NAV fell. A rate-driven dip can reverse, while a default may not.
- Putting all debt money in one fund. Spread it across categories.
- Skipping the scheme document. It lists the rules and risks in plain terms.
Who Should Invest?
Corporate bond funds suit people with a goal three or more years away, such as a home down payment or a child’s fees. They also suit first-time debt fund investors who want more than a savings account and can handle small dips.
Credit risk funds suit experienced investors who can read ratings, afford a loss, and keep the fund to a small part of their portfolio.
Neither suits someone who needs the money within a year, holds emergency savings or wants a fixed payout. An FD or liquid fund fits those needs better.
Conclusion
Corporate bond funds lend mostly to strong companies and aim for steady returns. Credit risk funds lend to weaker ones for higher interest, and one default can wipe out months of it. Your choice depends on how much loss you can accept and when you need the money. Before buying either, open the factsheet and look at the ratings of what the fund owns. If those ratings surprise you, pause and ask why before you invest.
Frequently Asked Questions
Blog by Aliceblue News Desk
