MFS beat a retreat from lower-rated papers

Mutual funds have retreated from AA- and below-rated papers, signifying a flight to safety in the aftermath of the IL&FS crisis that unfolded last year.

As a percentage of overall debt assets, investments in Aaa-rated and sovereign papers has surged 10.3 percentage points in the past year to 38 per cent, data from Value Research shows. Conversely, investment in AA- and below-rated papers has reduced 9.6 percentage points to 62 per cent.

Corporate India has stepped up due diligence of its mutual fund investments, which has compelled fund houses to tweak their portfolios to include more Aaa-rated companies and sovereign public sector undertakings, even if it means sacrificing returns.

“Investors are still concerned about safety, and looking at the quality of the portfolio, not just brand names. They have also realised that there is a high likelihood of losses being passed on to investors in the event of downgrades or credit defaults, and not being absorbed by AMCS (asset management companies),” said Dwijendra Srivastava, CIO – fixed income, Sundaram MF.

Institutional investors have put in more checks and balances in place before committing monies to debt schemes. This includes assessing the investment processes of individual fund houses, their philosophy on taking credit risks, on-boarding process, size of internal credit teams, their ability to stick to the scheme mandate, and the overall risk management processes they have in place.

“There has been a flight towards safety in the light of recent events in the debt market. Also, the spreads on ‘risk’ assets have narrowed, so there is not enough reward for taking the additional risk on credit papers or ‘risk’ assets,” said Mahendra Jajoo, head, fixed income, Mirae Asset Management Company.

Investors have continued to pull out their monies from credit risk funds. So far, in the current financial year, the net outflow from credit risk funds stand at ~16,133 crore. In September, investors pulled out ~2,351 crore of funds from this category.

According to industry experts, the pace of credit rating downgrades and instances of defaults have made investors nervous on funds that invest in relatively risky debt papers, which could lead to further accelerated outflows if the sentiments do not improve.