New Delhi, Sept. 5 -- Credit-risk funds have emerged as the best-performing debt mutual fund category over the past three years, delivering 8.97% returns. The category has benefited from improving corporate balance sheets, lower leverage, better profitability and easing concerns around defaults.

The strong performance, however, comes with a higher level of risk. Credit-risk funds invest in lower-rated corporate bonds to generate higher yields, exposing investors to the possibility of downgrades, defaults and liquidity stress.

For investors considering the category after its recent performance, experts say the key is to look beyond returns and understand how those returns were generated.

Credit-risk funds benefited from a favourable cre...