Global عربي
KSA عربي
Global عربي
You have heard about equity funds but debt funds are becoming a significant consideration for professional investors when it comes to portfolio income and diversification.
The International Monetary Fund estimates that the global private credit market had assets and dedicated capital of approximately $2.1 trillion in 2023, emphasizing the increasing importance of private lending outside of the public debt markets.
The private credit has slowly transitioned from a niche asset to a more traditional asset class as institutional investors like pension funds, insurers and asset managers seek other avenues for returns.
However, historically, the biggest problem in the way of retail investors was access. The opportunity was usually only available to institutions and those with a lot of money and credit expertise, as private loans were often illiquid and required significant investments.
This is slowly changing as regulated investment platforms begin to offer individual investors debt-based investment opportunities.
This change is increasingly significant in Saudi Arabia, where a regulated debt-based crowdfunding platform can match investors with established companies looking for funds. According to Funding Souq, investors can access private credit opportunities in Saudi SMEs through Sharia-compliant financing, with the returns projected based on the investment and the risk level of the underlying business.
The answer to this question lies in the understanding of debt funds, sources of income and the risks that investors face for gaining such income. As private credit gains more traction in 2026, it is critical to be aware of those trade-offs before adding private credit assets to your portfolio.
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Get fundedA debt fund is an investment fund that collects funds from investors to invest in debt, which includes government or corporate bonds, loans and other fixed-income securities.
So in simple terms, the investors give the money, the borrowers take the money and use it to fund their activities and the interest or other income earned as a result of the investments can be returned to the fund and ultimately, the investors.
The actual return and risk will vary based on the nature of the debt held by the fund, the borrowers involved and the structure of the investment.
The basic process is easier to understand when broken into a few steps;
This is a way for investors to allocate funds over several debt investments rather than lending a large amount of money to a single borrower. That diversification can minimize the effect of one borrower's default but not eliminate credit or other investment risks.
A similar concept in Saudi Arabia is debt-based crowdfunding, which involves crowdfunding being raised through a regulated platform and then loaned to businesses.
SAMA's rules impose licensing requirements and risk management requirements on licensed platforms, while its 2024 updates introduced additional disclosure requirements, such as platform default rates.
It includes multiple approaches and therefore the risk and the expected returns may differ significantly. Common categories include;
This distinction is important because a debt fund is not automatically considered to be a low-risk fund. An investor is actually taking on the underlying borrowers, the terms of the loans, the quality of the credit and the liquidity of the loans.
The simplest way to know the difference is to consider where the return comes from. The key difference between a debt fund and an equity fund is that with a debt fund, you are mainly exposed to the income that you get from lending out your money, whereas with an equity fund, you are mainly exposed to the companies that you are investing in, with the potential for either gains or losses that affect the value of the companies.
This difference influences nearly all of the other things, such as the risk you are taking and even how much your investment can fluctuate in value over time.
But it doesn't mean that debt is necessarily safer or equity always more rewarding. A government bond fund may not be as risky as a private direct-lending fund and a diversified equity fund may not be as risky as a concentrated stock portfolio.
This is particularly important for investors in Saudi Arabia, as the rise of private credit and debt-based crowdfunding opens up new avenues for investors to engage in business financing. Instead of investing in a company, investors may be able to make money by providing financing to a business, depending on the arrangement, the credit risk and the credit assessment and due diligence of the business.
Finally, it's not just a matter of safer debt versus riskier equity. It is a question of knowing where the return is coming from, what factors may impact the return and what risks are being accepted in exchange for the return.
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Get fundedOne of the simplest methods for grasping the concept of private credit is through direct lending. A direct lending fund is a type of fund that offers financing directly to businesses instead of purchasing shares in a company or investing in a traditional public bond market.
The business gets the capital it is seeking and the investors make money according to the terms of the financing. The appeal is simple for both sides: investors enjoy access to business lending and companies receive a new financing alternative to traditional bank lending.
The process is relatively simple but the credit assessment which lies behind it can be detailed. The first step in a direct lending fund is to identify businesses that require finance and then evaluate their capacity to repay.
Upon approval of a business, the fund offers the financing and is repaid on a scheduled basis over the term of the repayment.
The key is that the investor is not just dealing with the trades of public markets but the credit of the underlying companies. This implies that the return may be less tightly linked with the daily movement in stock prices but the investor assumes credit and liquidity risk in case of any borrower's inability to repay.
This model is especially useful for SMEs that might require working capital or expansion financing but don't wish to depend on traditional bank loans. In Saudi Arabia, Funding Souq is an example of how the technology can bridge between established businesses that are looking for funding and retail or institutional investors.
The platform claims that credit assessment and due diligence is completed prior to businesses being offered financing opportunities for investors.
These assessments take into account the financial performance, credit history, management strength and other aspects, including a site visit. The investors can then provide financing for the approved opportunities and the businesses can repay on the agreed schedule.
In that case, the idea becomes more understandable: the business is able to borrow the money and the investors are able to lend the money into the business and end up being paid back on a regular basis. According to Funding Souq, its Saudi platform is licensed by the Saudi Central Bank and provides private credit opportunities that comply with Shariah principles.
One of the primary areas of focus for the private credit has been returns but the headline figure is just the beginning of the story. The more appropriate question is how those returns have been achieved and whether they are better than other asset classes.
Over the past few decades, private debt has generally returned 10-15% per year but this can vary widely by fund and strategy.
The Cliff water Direct Lending Index, which is one of the most popular indexes of direct lending in the United States, rose by 9.3% in 2025 and averaged approximately 9.5% per year for nearly 22 years. It had a trailing one year return of 7.7% by June 2026.
This range is helpful for investors as a context but shouldn't be looked at as a guaranteed return. The interest income, borrower repayments, default rates, fees, leverage and investment structure all impact private credit performance.
On Saudi platforms, you may be able to see higher potential returns. For now, investors can get up to 15% per year on financing of existing Saudi SMEs depending on the credit rating of the business, the duration of the financing and the performance.
This is a target, not a market benchmark or guaranteed return but a platform target.
The comparisons are more useful when returns are made on the basis of risk and volatility.
The figures demonstrate why the debt can be appealing despite being the lowest-performing investment in a given year. The equity can provide much higher returns in bull market periods but can also have significant drops during bear markets.
While private debt is typically based on contractual income and payment, borrowers can still default and private investments may be hard to liquidate rapidly.
The objective for the investor is thus not only to seek the highest percentage. The debt allocation can be appropriate if the investor is interested in consistent income, diversification and a source of return that doesn't rely on public stocks but is willing to take on the credit and liquidity risk associated with private lending.
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Get fundedThe returns on debt investments may be attractive, particularly if they are better than those that may be achieved on traditional debt investments. However, there's never a free higher return.
It typically implies assuming more risk in some part of the investment. When it comes to debt funds and private credit, it is necessary to know the potential pitfalls before you can consider the possibilities of success.
The greatest danger is that the borrower will not pay back.
If a fund lends money to businesses, its income is based on the businesses periodic payments. When a borrower has cash-flow issues, fails to make timely payments or is unable to repay the loan, the investor may end up with a lower income or in extreme cases, a loss of some of the capital itself.
That's why the borrower's quality is important. In Saudi Arabia, SAMA's rules require debt-based crowdfunding companies to assess factors such as a business's financial position, repayment ability, credit history and business plan before financing is offered. The platforms must also disclose information about defaults to investors.
The next issue is how easily you can get your money back.
While bonds and shares are usually traded publicly, there are other methods of trading such as private loans. If you've invested in a private-credit product till maturity, you might not be able to get out of it if you suddenly need cash.
Debt investments can be influenced by interest rates as well. The relative attractiveness and value of current debt can also change when market rates move.
According to BIS, that illiquidity and reduced transparency are significant factors to be taken into account when private credit becomes more available to retail investors.
Another risk factor that investors may not consider is the platform itself.
While platforms that are regulated offer an additional layer of regulation, it does not mean that all investments will be profitable.
In Saudi Arabia, debt-based crowdfunding companies are regulated by SAMA and must have risk-management arrangements covering areas including credit, operational, legal, technology and cybersecurity risks.
For an investor, the practical lesson is simple. Never consider a debt investment based on the advertised rate of return. Consider who's borrowing the funds, how the money is being invested, how long the money is dedicated and what might happen if the borrower fails to pay.
That is why a high-yield debt investment is worth considering: not only because of the return it offers but because of whether the return you're getting is reasonable for the risk you're taking.
The private credit is not restricted to bigger institutions only. In Saudi Arabia, the rise of the regulated debt-based crowdfunding KSA platforms has made it easier for individual investors to engage in business financing.
In accordance with SAMA's framework, investors can fund a business through a licensed crowdfunding company, where the investment is defined as a loan to the business.
The first thing to do is to verify if the platform has a license to provide debt-based crowdfunding in Saudi Arabia. The companies that engage in this activity are required to be licensed by SAMA, which provides a basic regulatory check before investors invest their money.
After an account is opened and identity verifications are finished, investors can look at the financing options available. It's not just about finding the best expected return but the investors should consider;
This review is important because it's based on the underlying business's ability to repay.
If a new investor invests all of his or her funds in a single business, they may be exposed to unnecessary concentration risk. The saudi regulations impose restrictions on the amount a participant can commit to a particular financing opportunity as well as on the total amount the participant has outstanding financing in the platform.
The platforms such as Funding Souq illustrate how this process works in practice. Investors who are eligible may explore financing options and select the site to invest their money while the platform will take care of the financing process and the periodic repayment.
The main thing to remember is that it might be more convenient to get in but investing is still a matter of judgment. A retail investor should think of debt-based crowdfunding as an investment in business credit rather than an income-producing investment.
For those seeking investment avenues other than stocks and bonds, debt funds have emerged as a viable choice. By providing exposure to loans and other debt instruments, they can offer a different source of income while potentially adding diversification to an investment portfolio.
This asset class is also becoming more accessible to investors who have previously had less opportunity to invest in it, just because of the expansion of private credit and debt-based crowdfunding.
But there are risks involved that should not be ignored when looking at the potential for attractive returns. There are several factors to consider when deciding whether a debt investment is appropriate, including borrower quality, repayment capacity, liquidity, investment structure and diversification.
Therefore, a higher projected return should be considered in relation to the amount of risk involved in achieving it.
Finally, debt funds are not an alternative to equity or other asset classes. They can be another avenue for investors to diversify their portfolios, especially if they are seeking regular income and also exposure to private credit.
The opportunity is becoming more accessible for retail investors in 2026 but thorough research and understanding of the inherent risks are still crucial.
It is an investment company that invests investor’s capital in debt instruments like loans, bonds or other credit products. This is then applied to loaning to governments, companies or other borrowers depending on the strategy of the fund.
These borrowers make interest payments and eventually repay their debt, which provides the fund with its income. The profit generated from this income can then be distributed to investors but the returns they receive will vary based on the assets held in the fund and their performance.
That is a structure where investors will make money by lending, not by being a stakeholder in the business.
The difference is primarily related to who owns the investment and how investors benefit from it. The returns of that debt fund are typically tied to the interest, the credit quality of the underlying debt and the repayment of the debt.
By contrast, these equity funds invest in company stocks, so that investors can profit from increases in the value of their stocks and dividends.
This also gives rise to different risk patterns, since the prices of equity investments can fluctuate significantly depending on the performance of the company and market sentiment whereas the price of debt investments is more closely tied to the borrower's capacity to repay the investment.
This is not an absolute number as the returns from debt funds would be influenced by the type of debt, borrower quality, interest rates, fees and the debt fund strategy.
So a government bond fund can deliver a completely different return as compared to a private-credit or high-yield approach.
These disparities exist in the Saudi market as well, with Funding Souq currently claiming that the returns on financing existing SMEs in Saudi could be as high as 15% per annum, depending on the credit rating and financing duration.
This is a stated potential return and actual performance is dependent on the underlying investments.
It is a very common question because “debt” might make an investment appear more secure than it actually is. The risk would be largely dependent upon the fund's holdings as borrowers may default and interest rates may impact debt investments.
These risks may be increased in the case of private credit, where the underlying loans are typically less readily traded and less easily valued than securities listed on a public exchange.
This does not imply that the debt funds are not suitable for retail investors but it does imply that an investor should know the borrowers, investment duration, diversification and loss before investing.
This process relies on the kind of debt investment that is being taken into account since a traditional debt fund and Saudi debt based crowdfunding are not the same structure.
However, retail investors in Saudi Arabia can participate in debt-based crowdfunding through platforms that are licensed under SAMA and through which investors provide funding to qualified Saudi businesses.
These opportunities enable investors to read through each financing request and make decisions on where to invest their funds within the boundaries of rules and limits.
The first step is therefore to verify the platform's regulatory status, understand the business and financing terms and only invest the amount that matches the risk level.
Take your company to the next level with finance that arrives in days.
Get fundedDisclaimer:
This post is for educational purposes only, and does not constitute investment advice or a solicitation to take any financial action. It should not be relied upon when making investment or financing decisions.
