Private credit is growing. But is the return worth the risk?

Private credit refers to loans given by non-bank lenders. This investment class has seen double-digit growth over the last five years, with industry estimates placing assets under management at $25-30 billion, and most wealth managers now offer it in some form.

According to EY India, calendar 2025 saw 166 private credit transactions worth $12.4 billion, up 35% over 2024. Real estate funding accounts for about 42% of India's private credit deals, while healthcare and industrial each account for 15%.

Why the rapid growth? One reason is the less appealing expected returns on equity against the potential of up to 22% on private credit; the other is structural. After the 2008 financial crisis, the central bank tightened lending parameters for banks and NBFCs, and this became more stringent after covid-19, leaving a gap in funding businesses that fell outside conventional lending and needed quick money, flexible terms, different structures, or alternate collateral. Consequently, risk increases, but the investor is rewarded with potentially higher returns.

Debt, but riskier

It is a debt product inherently, but riskier than conventional debt, so it cannot substitute for your low-risk debt allocation. The advantage private credit offers is greater flexibility in structuring loan terms for issuers, while meeting specific risk and return requirements for investors.

Unlike traditional lending, which is governed by the RBI's prescriptive lending rules, private credit sits under a disclosure-driven framework that relies on transparency from the fund, investor knowledge, and informed choice. In short, the risk to investors is that private credit is not closely regulated.

A few things are worth understanding before investing: the fund's underwriting philosophy, its track record, who it lends to, how tight its covenants are, how safe the collateral is (loans can be secured against unlisted shares, promoter equity and a lot more), and the lock-in period, typically five to seven years, with a minimum mandate of three.

On returns, an advertised 18% is not the same as an actual 18%. Fees and taxes take a bite, and if the return is largely interest income, it is taxed at your slab—18% interest income effectively becomes 12.6% for someone in the 30% bracket, before surcharge and cess. Delays, repayments, defaults, and the opportunity cost of idle capital also chip away at returns.

Risk has a price

On risk, equity investors earn the highest potential return because they own the business, but they are last in line if it goes bankrupt—high risk, uncapped reward. A private credit investor takes real risk too, but with a cap on the upside. Private loans also do not trade daily, so the NAV may not reflect true market value.

For example, if a fund lends ₹1 crore with interest and principal due at maturity, the loan stays classified as performing as long as the borrower services it—which could be as little as ₹9 lakh a year at 9% interest—with true stress only visible at maturity.

Questions to ask

Before investing, it is worth asking who the borrowers are and why they did not simply approach a bank or NBFC; what the fund manager's pedigree and track record are, and whether they have skin in the game; how many loans sit in the portfolio and of what kind; how strong the underwriting is; what buffer exists for defaults, and how past funds have fared; what the fees are, direct and hidden; and whether there is any conflict of interest, since many advisors recommend funds run by affiliate companies.

Private credit is not a high-yield substitute for traditional debt—it is an alternative strategy where investors are paid higher expected returns for accepting higher credit, liquidity, manager, and valuation risk.

The CIO of a large family office noted that they are pitched a minimum of 10-15 credit AIFs a year, and typically invest in only one or two, capping total allocation at 5-6% of the portfolio—this from a team whose only job is identifying the best investments.

This investment may suit you if you have the resources, your own or through others, to thoroughly understand the product and its risks and returns; if you have confidence in the fund house and manager; and if you can absorb a loss of capital in the worst case without it affecting your cash flow or main goals.

The simple rule of investing is: don't invest if you don't understand. As the late Parag Parikh put it - deciding not to take a decision is also a decision.

Khushboo Joshi is president of wealth management at PPFAS Wealth

Disclaimer: MintMoney has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. MintMoney does not promote or encourage taking credit, as it comes with a set of risks, such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.

To apply for instant loan, visit here