Credit Risk Fund: Why SEBI Bars Words Like High Yield From the Name

A credit risk fund is the one debt fund category in India whose name tells you the risk rather than the reward. That’s deliberate. When SEBI sorted mutual fund schemes into fixed categories in 2017, it said this category had to put most of its money in bonds rated below the top grade, and it banned names that sell only the upside. Words like “High Yield” and “Credit Opportunities” were struck out. What was left is a label that reads almost like a warning, and honestly, that’s the most useful thing about it.

This piece walks through what the rules actually say, how the ratings and the 65% floor work in practice, and how to think about the extra yield these funds offer. We’ll use a made-up portfolio to do the arithmetic, because that’s where the trade-off becomes obvious.

What SEBI’s rules say a credit risk fund must hold

The category was created by SEBI’s circular of October 6, 2017 on categorisation and rationalisation of mutual fund schemes. In that first version, the circular as published by AMFI defined a credit risk fund as a scheme with a minimum of 65% of total assets in corporate bonds, invested in “below highest rated instruments”.

Two months later SEBI tightened the wording. Its December 4, 2017 amendment allowed corporate bond funds to invest in AA+ and above, and correspondingly said credit risk funds would invest in AA and below, excluding AA+ paper. That split still stands. The SEBI Master Circular for Mutual Funds as on March 20, 2026 describes the category this way: a minimum investment in corporate bonds of 65% of total assets, only in AA and below rated corporate bonds, and a scheme type of “an open ended debt scheme predominantly investing in AA and below rated corporate bonds (excluding AA+ rated corporate bonds)”.

So the mandate is clear. Two-thirds of the fund, roughly, has to sit in paper that the rating agencies consider a notch or more below the safest corporate borrowers. The fund manager can’t quietly park everything in AAA bonds and still call it a credit risk fund.

Why “High Yield” is banned from the name

The 2017 circular attached a footnote to the credit risk fund row. It said words or phrases that highlight or emphasise only the return aspect of the scheme shall not be used in the name, and it gave three examples: Credit Opportunities Fund, High Yield Fund and Credit Advantage.

Think about what those names do to a retail investor. “High Yield” puts the payoff in the headline and leaves the cost for the fine print. “Credit Opportunities” sounds like the fund has spotted something clever. Neither tells you that the extra return exists because the borrowers are weaker and the market wants to be paid for that.

The current master circular keeps the same idea and makes it broader. Paragraph 3.8.7 says that, to keep schemes “true-to-label”, the scheme name shall be the same as the scheme category, and that words or phrases that highlight or emphasise only the return aspect shall not be used in the name. Paragraph 3.8.9 says existing schemes must bring their nomenclature and other parameters in line with the categories by August 26, 2026.

The yield on a credit risk fund isn’t a reward for the fund manager’s skill. Mostly, it’s the price the market charges for lending to weaker borrowers.

How the 65% floor works once liquid assets come in

There’s a wrinkle that most explainers skip. Under paragraph 5.7.1 of the master circular, all open-ended debt schemes, except overnight, liquid, gilt and 10-year constant maturity gilt funds, must hold at least 10% of net assets in liquid assets. Liquid assets here means cash, government securities, T-bills and repo on government securities.

Paragraph 5.7.2 then says those liquid assets are not counted when checking the category’s asset allocation limits, and it names credit risk funds among the categories where the base becomes net assets minus that 10%. SEBI’s own illustration uses the banking and PSU category: 80% of 90% of net assets, or 72%. Apply the same method to a credit risk fund and the floor works out to 65% of 90%, which is 58.5% of net assets in AA-and-below corporate bonds. That’s our arithmetic, following SEBI’s illustration, not a number SEBI prints for this category.

In plain terms, a credit risk fund can hold a cash-and-government-bond cushion and still meet its mandate, but the cushion doesn’t dilute the requirement to own lower-rated paper.

Reading the credit risk value of a portfolio

Every debt scheme also has to show where it sits on SEBI’s Potential Risk Class matrix. Under paragraph 6.18 of the master circular, each instrument gets a credit risk value, or CRV. Government securities, state development loans, repo on government securities, TREPS and cash score 13. AAA scores 12, AA+ 11, AA 10, AA- 9, A+ 8, A 7, A- 6, BBB+ 5, BBB 4, BBB- 3, unrated paper 2 and below investment grade 1.

The scheme’s CRV is the weighted average of those scores, weighted by each holding’s share of AUM, with bonds valued at dirty price, so accrued interest is included. The matrix then puts the scheme into one of three credit classes: Class A for a maximum CRV threshold of 12 or more, Class B for 10 or more, and Class C for below 10. Class C is the column labelled “Relatively High Credit Risk”.

The master circular’s footnote to these classes also notes that mutual funds may invest only in investment grade securities. So a credit risk fund isn’t buying junk bonds by design. It’s buying the lower rungs of investment grade, mostly AA and A.

A worked example with a hypothetical portfolio

Let’s build a fund of ₹100 crore. The numbers below are invented to show the mechanics; they don’t describe any real scheme.

• ₹10 crore in TREPS and government securities (CRV 13)
• ₹15 crore in AAA bonds (CRV 12)
• ₹15 crore in AA+ bonds (CRV 11)
• ₹40 crore in AA bonds (CRV 10)
• ₹15 crore in A+ bonds (CRV 8)
• ₹5 crore in A bonds (CRV 7)

Does it meet the mandate? AA-and-below corporate bonds come to 40 + 15 + 5 = ₹60 crore, or 60% of net assets. That clears the 58.5% floor we worked out above. The AA+ and AAA holdings don’t count towards it.

What’s the CRV? Multiply each weight by its score and add up: 0.10 × 13 = 1.30, 0.15 × 12 = 1.80, 0.15 × 11 = 1.65, 0.40 × 10 = 4.00, 0.15 × 8 = 1.20 and 0.05 × 7 = 0.35. The total is 10.30.

That’s interesting. A CRV of 10.30 is above 10, so this particular portfolio sits within the Class B threshold, not Class C. A fund can meet the credit risk category rules and still have a moderate average CRV, because the high-scoring cash and AAA slice pulls the average up. The flip side is that an average hides the tail. Twenty percent of this fund is in A+ and A paper, and that’s where trouble usually starts.

Also remember the matrix shows the maximum risk a scheme is allowed to take, not what it holds on a given day. Paragraph 6.18.6 says schemes have the flexibility to move downwards on the risk scale. So the portfolio disclosure, not just the risk class, is what you should read.

What the extra yield actually buys you

Now the uncomfortable sum. Suppose, hypothetically, this credit risk fund earns 1.5 percentage points a year more than a fund holding only AA+ and AAA paper. Sounds good. Then one issuer making up 5% of the portfolio defaults and the bond is marked down by 75%.

The NAV hit is 5% × 75% = 3.75%. At 1.5 percentage points a year of extra return, that single event wipes out 3.75 ÷ 1.5 = 2.5 years of the yield advantage. One bad bond, two and a half years of carry gone. And defaults in lower-rated paper don’t come one at a time politely; they tend to cluster when credit conditions turn.

That’s why we’d look at a credit risk fund the way a lender looks at a loan book. How many issuers? How big is the largest single exposure? How much is in A and below? Has the fund been building or cutting its weaker holdings? Those questions matter more than last year’s return.

One bond falling sharply can erase years of the extra carry, which is why concentration matters more than the headline yield.

The safety valves SEBI has added

None of this means investors are left on their own when a bond goes bad. The master circular has a few provisions that matter most in this category.

Segregated portfolios. Under paragraph 5.5, an AMC may carve out a downgraded bond into a separate portfolio when a SEBI-registered rating agency cuts it to below investment grade, or cuts it further from there, and similar downgrades apply to loan ratings. When agencies disagree, the most conservative rating is used. For unrated paper, an actual default on interest or principal is the trigger. We’ve explained the mechanics in our piece on how a segregated portfolio or side pocket works.

In-house credit checks. Paragraph 5.4 requires every AMC to have a policy for its own credit assessment of debt instruments before investing and on a continuous basis, including early warning signals such as yield-based alerts, with the response reported to trustees.

Swing pricing. Paragraph 5.8 applies a swing pricing framework to open-ended debt schemes other than overnight, gilt and 10-year gilt funds, for net outflows. In normal times AMCs decide when to apply it, and in market dislocations there’s a mandatory full swing for high-risk open-ended debt schemes. The idea is that investors who rush out in a crisis bear more of the cost of selling, rather than leaving it to those who stay.

These help. They don’t remove the risk you’re being paid for.

Credit risk fund vs corporate bond fund vs banking and PSU fund

It helps to see the category next to its neighbours, all from the same SEBI table:

• Corporate bond fund: at least 80% of total assets in corporate bonds rated AA+ and above.
• Credit risk fund: at least 65% of total assets in corporate bonds rated AA and below, excluding AA+.
• Banking and PSU debt fund: at least 80% of total assets in debt of banks, PSUs, public financial institutions and municipal bonds. Our explainer on the banking and PSU fund’s 80% rule goes into what that does and doesn’t cover.

The first and third are built around the quality of the borrower. The credit risk fund is built around accepting lower quality. That’s not a bad thing in itself; it’s just a different job.

Who should even consider one

A credit risk fund can make sense as a small satellite in a debt allocation for someone who understands that the NAV can drop suddenly and who can wait out a recovery. It’s harder to justify as an emergency fund, a parking place for money needed on a fixed date, or a substitute for a fixed deposit. If the reason you’re looking is simply “it yields more”, go back to the name. SEBI made the fund house put the risk in the title for a reason.

If you’re building a broader plan around position sizes and losses you can live with, our guide to risk management in trading covers the same principle from the equity side: decide how much you can lose before you think about how much you can make.

The short version

A credit risk fund must keep at least 65% of its assets, excluding the mandatory 10% liquid cushion from the base, in corporate bonds rated AA or lower. SEBI barred names like High Yield Fund, Credit Opportunities Fund and Credit Advantage because they advertise only the return. Read the portfolio, check the weakest holdings and the biggest single exposure, and treat the extra yield as payment for risk, not a free bonus.

Sources: SEBI circular dated October 6, 2017 (via AMFI); SEBI circular dated December 4, 2017 (via TaxGuru); SEBI Master Circular for Mutual Funds as on March 20, 2026. All portfolio and yield figures in the worked examples are hypothetical.

Disclaimer: This article is for information and education only and is not investment advice. Please consult a SEBI-registered adviser before making any investment decision.