IL&FS cri­sis: How real is the risk in debt funds?

Mint Asia ST - - Money -

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

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