Assuming similar duration, which sequence correctly ranks debt scheme categories in increasing order of credit (default) risk (from safest to highest credit risk)?

[ A ]Credit Risk Funds -> Corporate Bond Funds -> Banking & PSU Debt Funds -> Gilt Funds

[ B ]Corporate Bond Funds -> Gilt Funds -> Credit Risk Funds -> Banking & PSU Debt Funds

[ C ]Gilt Funds (Sovereign) -> Banking & PSU Debt Funds -> Corporate Bond Funds (min 80% AA+) -> Credit Risk Funds (min 65% in AA and below)[ CORRECT ]

[ D ]Small Cap Equity Funds -> Multi Cap Funds -> Large Cap Funds -> Gilt Funds

Takeaway

Option C is correct: Gilt Funds (Sovereign) -> Banking & PSU Debt Funds -> Corporate Bond Funds (min 80% AA+) -> Credit Risk Funds (min 65% in AA and below)

Derivation

Credit risk reflects the probability of issuer default: (1) Gilt Funds hold sovereign Government of India securities with zero credit risk. (2) Banking & PSU Debt Funds invest in public sector entities and banks with high sovereign backing. (3) Corporate Bond Funds invest >=80% in highest-rated AA+ and above corporate bonds. (4) Credit Risk Funds invest >=65% in lower-rated corporate bonds (AA and below), carrying the highest default and rating migration risk. This tests credit risk classification. The primary mistake is confusing sovereign zero-default gilts with credit risk funds.

Why the others fail

A — Credit Risk Funds -> Corporate Bond Funds -> Banking & PSU Debt Funds -> Gilt Funds

This sequence ranks schemes in decreasing order of credit risk, starting with the riskiest (Credit Risk Funds).

B — Corporate Bond Funds -> Gilt Funds -> Credit Risk Funds -> Banking & PSU Debt Funds

Gilt funds carry sovereign zero credit risk and must rank lower in credit risk than Corporate Bond funds.

D — Small Cap Equity Funds -> Multi Cap Funds -> Large Cap Funds -> Gilt Funds

Equity funds represent ownership capital and are not categorized within the debt fund credit risk hierarchy.