Credit risk funds are open ended debt funds that invest at least 65% of their assets in lower than AA-rated papers/ bonds. The borrower companies pay higher interest charges to compensate for their lower credit rating. The investor faces higher default as well as liquidity risk. Credit-risk funds earns in two ways: one, they earn interest income on the securities they hold. Secondly, since they invest in lower-rated securities, if the rating of a security is upgraded, they make gains. If the bond defaults or faces a downgrade, it may be difficult for the fund manager to exit the investment.