Credit Rating
An agency assessment of an issuer's ability to service its debt on time.
Indian ratings run from AAA down to D. In debt funds and NCDs, a small extra yield rarely compensates for a rating below AA, because downgrades hit prices before defaults occur.
Why Credit Rating matters when comparing products
Credit ratings are crucial when evaluating fixed-income financial products like Non-Convertible Debentures (NCDs) or debt funds in India. They indicate the issuer's financial strength and likelihood of repaying borrowed money, including interest, on time. A higher rating generally suggests lower risk of default. Understanding these ratings helps investors assess the risk-reward tradeoff and make informed decisions about their investments.
Illustrative example
Consider two NCDs, both offering a 9% annual interest rate. NCD 'A' has a AAA rating, while NCD 'B' has a BBB rating. While both yield 9% on a principal of ₹1,00,000, NCD 'B' carries a higher perceived risk of delayed payments or default compared to NCD 'A'. An investor might prefer the AAA-rated option for its greater security, even if the yield difference is minimal.