Explained: Debt mutual funds and credit ratings

Explained: Debt mutual funds and credit ratings

Mutual Funds
by 5paisa Research Team Last Updated: 2022-07-20T13:39:31+05:30

Credit ratings are regarded as one of the most scrutinised characteristics when investing in debt securities. Continue reading to learn more about it.

People most often use the star ratings for mutual funds to narrow down their choices, and the majority of these funds are awarded four or five stars. Likewise, individuals rely on credit ratings when making investments in debt instruments like commercial papers, debentures, bonds, corporate deposits, term deposits, etc.

Credit ratings are assigned to various debt instruments by credit rating agencies such as CRISIL, ICRA, Fitch, and others.

Rating 

Description 

CRISIL AAA 
(Highest Safety)
 

Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry the lowest credit risk. 

CRISIL AA 
(High Safety)
 

Instruments with this rating are considered to have a high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk. 

CRISIL A 
(Adequate Safety) 

Instruments with this rating are considered to have an adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk. 

CRISIL BBB 
(Moderate Safety) 

Instruments with this rating are considered to have a moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk. 

CRISIL BB 
(Moderate Risk) 

Instruments with this rating are considered to have a moderate risk of default regarding timely servicing of financial obligations. 

CRISIL B 
(High Risk)
 

Instruments with this rating are considered to have a high risk of default regarding timely servicing of financial obligations. 

CRISIL C 
(Very High Risk) 

Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations. 

CRISIL D 
Default
 

Instruments with this rating are in default or are expected to be in default soon. 

Notes: 
CRISIL may apply '+' (plus) or '-' (minus) signs for ratings from 'CRISIL AA' to 'CRISIL C' to reflect comparative standing within the category.
 

Source: CRISIL 

The table above depicts CRISIL's long-term credit ratings, as well as what each credit rating represents. In the coming paragraphs, we will learn how these credit ratings are connected to debt mutual funds.

A debt fund is a collection of debt securities. As previously stated, the approach of each debt fund differs. Some may experiment with length, some with interest rates, and yet others with credit risks.

As a result, it is critical to focus on strategy before investing in debt funds. Furthermore, because debt funds invest in a variety of debt instruments, the majority of them have varying credit ratings. Therefore, it is more prudent to examine the average credit ratings of the debt funds in order to comprehend the risk involved.

Furthermore, funds betting on credit rating upgrades stand to benefit the most, as credit rating upgrades are a favourable indicator. If, for example, a BBB-rated instrument gets raised to an 'A' credit rating, the returns on that instrument rise as the yield on the same instrument falls.

And, as we all know, as rates fall, bond prices rise, and vice versa. As a result, such improvements are worth noting since they also have an influence on the company's share price.

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Disclaimer

Investment/Trading in securities Market is subject to market risk, past performance is not a guarantee of future performance. The risk of loss in trading and investment in Securities markets including Equites and Derivatives can be substantial.

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