IL&FS crisis: How real is the risk in debt funds?
lion mutual funds industry undertook at the behest of capital market regulator Securities and Exchange Board of India (Sebi), both these type of funds, credit risk and corporate bond funds, are now clearly segregated, and come with clear boundaries.
The problem comes when other types of debt funds, like liquid and ultra short-term bond funds, take risks that not everyone is comfortable with. Take IL&FS and its subsidiaries’ example. It’s not just the credit risk funds that invested in these scrips. Apart from credit risk funds that were invested in IL&FS Transportation Networks Ltd, ₹ 12.52 crore worth of medium duration funds and ₹ 62.58 crore worth of ultra short-term funds were also invested in them, according to figures given by Value Research. Liquid funds worth ₹ 406.19 crore had invested in IL&FS Financial Services Ltd, whose short-term paper defaulted and ₹ 49.84 worth of liquid funds have invested in Infrastructure & Leasing Financial Services Ltd.
If liquid and ultra short-term bond funds are meant to be the least risky of all debt funds, then what should you do if your fund is caught holding such companies that get into trouble? The analyst quoted above reiterates that it’s important that investors sit with their financial planners and stick to funds that invest in the highest grade paper and those that come with a proven track record. That can minimise risk. Although investment grade papers too can quickly turn into junk, although the chances are lower ( see graph), just like it happened with many IL&FS papers that funds have held. Further, there were a few fixed maturity plans (FMPS) that also invested in IL&FS papers. These are closedend funds that come with a fixed maturity; those who wish to exit prematurely can do so on stock exchanges at market prices (these usually trade at prices lower than the prevailing NAVS) provided there are enough buyers there. Says Maneesh Dangi, co-chief investment officer, Aditya Birla Sun Life Asset Management Co. Ltd: “A closed-end fund like an FMP gets only 2-5 days to deploy its entire corpus. In such a short span of time, the fund manager may not find a whole wide bunch of securities to invest the fund’s proceeds in. Therefore, FMPS have concentrated portfolios. One such company’s default in a concentrated portfolio can bring down the NAV by a fairly large margin.”
As per Crisil and Value Research, nine FMPS worth a total corpus of ₹ 1,938 crore have been adversely affected by their investments in various IL&FS companies. They had invested 3-10% each in such companies. Industry experts said here too, investors can sit with their advisors to understand what sort of portfolios FMPS will invest in, before they invest in them. Stick to those that will invest in high-rated instruments. But if you don’t mind taking on some risks, there are FMPS that will take on credit risks as well.
Should you withdraw?
If you have invested in debt funds that are affected by IL&FS defaults, should you withdraw? “No,” said Sen. “There’s not much that investors in these affected debt funds can do, now that the NAVS have already fallen post default and downgrades.” Sen said that if a solution is worked out at IL&FS and the companies pay their lenders,the payment will push up the NAVS of those funds that had to mark them down earlier. “Exiting immediately means booking the loss, rather remaining invested will help recoup through accruals over time,” said Amandeep Chopra, head fixed income, UTI Asset Management Company Ltd. If you are invested in affected FMPS, it’s always better to stay invested till maturity. But even in open-ended funds, it makes sense to stay invested in these funds as IL&FS itself is busy working out a solution.
Lisa Pallavi Barbora contributed to the story