NEW DELHI: The problem that forced Franklin Templeton’s India unit to freeze Rs 31,000 crore hard-earned money of investors may haunt some other fund houses too, data crunching of securities held by debt fund schemes showed.
Debt schemes of some of the top fund houses like Nippon India AMC, ICICI Prudential AMC, IDBI MF, Kotak AMC and Baroda MF hold sub-AAA rated securities in proportions that may not be considered safe, especially after the Franklin fiasco.
“It’s worrisome because there is an example and that is why people are pulling out. Reality is, if liquidity dries up, anybody can face such problems. So far they have been able to manage it well. These are accidents, and they cannot be ruled out when liquidity dries up,” said Dhirendra Kumar, Founder of mutual fund research firm Value Research.
Franklin Templeton hoarded low-rated securities that turned illiquid amid risk aversion in the debt market, leading to some of the debt-issuing companies defaulting on their redemption obligations. About Rs 18,500 crore worth of mutual fund money is invested in sub-AAA papers that are up for maturity in 2020.
Industry watchers, however, pointed out that above-AAA rating will be too high a benchmark to judge fund schemes as debt papers of several established companies like Bharti Telecom, many PSUs and even select Tata group firms are rated AA.
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Don’t paint all funds with same brush
Vidya Bala, founder of Chennai-based Prime Investor, said one needs to look at specific fund categories instead of considering them en masse. “Some schemes may be at bigger risk than the others,” she said.
If a low duration or ultra short-term fund is holding 30-40 per cent of illiquid or low rated papers, then there will be an issue. Similarly in short duration funds, it may be okay to have 20-25 per cent of assets in illiquid or low rated papers. But if it is 50-60 per cent, like it was with Franklin, then a scheme can definitely face a liquidity crunch, she explained.
Riskiest fund categories
In the low duration fund category, schemes that have more than 30 per cent of their holdings exposed to below AAA-rated papers include Baroda Treasury Advantage Fund (47.33 per cent of total holding), Kotak Low Duration Fund (45.09 per cent), PGIM India Low Duration Fund (44.22 per cent) and L&T Low Duration Fund (42.46 per cent).
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In the ultra short fund category, Nippon India Ultra Short Duration (76.61 per cent), ICICI Pru Ultra Short Term Fund (55.53 per cent) and IDBI Ultra ST (35.25 per cent) hold more than 30 per cent money in such papers, data compiled by Accord Fintech showed.
Even for short duration funds, schemes of IDBI MF (69.35 per cent), Baroda MF (42.33 per cent) and HSBC MF (26.72 per cent) hold sub-AAA rated papers in proportions that could be considered risky.
"As the largest fixed income managers in India with total assets under management of $24 billion across various fixed income funds, over 85% of our exposure is in AAA-rated papers. Since the credit crisis started in India in 2018, ICICI Prudential AMC has so far not had exposure to a single issuer which defaulted due to its robust credit selection process. As an AMC, we have had an unmatched track record of having never encountered any delay in interest payments or defaults in any of our funds in our entire history of existence," the spokesperson said.
Top companies use some of these fund categories to park their surplus cash. With the lockdown putting pressure on cash flows, there has been redemption pressure on this class of funds.
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“If a fund belongs to low duration or ultra short duration categories, liquidity is very important. Because, a lot of corporate money is coming in and going out there. One huge redemption can put pressure. Holding low-rated or illiquid papers is a big risk in funds that fall in these categories. Investors holding such funds may have a reason to worry,” said Bala.
Fund houses build safeguards
Fund houses and industry body Amfi say the redemption pressure is no longer as big as it was in the wake of Franklin fiasco.
Moreover, the government's recent assurance to buy debt papers from NBFCs, which are among the most likely candidates for downgrades, has raised hope of stability.
Mutual fund houses have also shored up liquidity positions to deal with any such redemption pressure.
For example, IDBI Ultra Short Fund, Baroda Treasury Advantage Fund and L&T Low Duration Fund held more than 35 per cent of their portfolios in cash as of April-end.
“Learning from the Franklin episode, most fund houses have created far superior liquidity in their funds. Whatever changes they could make in their portfolios, they have done that to de-risk themselves from possible exodus of investors,” said Kumar.
He said the liquidity situation for sub-AAA debt papers is bad in the secondary market. “If all investors turn up to withdraw money, anything will fail.”
One reassuring fact is many of the funds seem to have managed to generate enough cash and keep it ready for any redemption. “At least the large ones do not seem to show any concern in terms of ready liquidity at this point in case there are redemptions,” said Bala.
Funds that are highly risky by default
Some fund categories by default have high exposures to low-rated papers, as they are meant for longer term investment.
“Medium duration, corporate bond or credit risk funds – for that matter – have longer holding requirements, and they are allowed to hold such papers,” said the co-founder at Prime Investor.
For instance, there is no bar on a medium duration fund holding lower rated papers. Investments in these funds are supposed to have an horizon of at least three years or more.
“Investors enter such schemes for the long term. They should not expect high liquidity in these funds,” Bala said.
Out of 16 schemes in the medium duration category, eight have over 30 per cent exposure to low-rated papers.
Are these risks really rewarding?
Aashish P Sommaiyaa, an industry leader, has a contrarian view. He says, historically, taking extra credit risk has not rewarded mutual fund investors even in such schemes.
“Data clearly shows that the fixed income experience is not that bad as it is made out to be. What stands out is that investors have not really made money by taking any form of credit risk. A look at corporate bond funds and credit risk funds will show their returns have been consistently poorer than even gilt funds,” said the Managing Director & CEO; Motilal Oswal Asset Management.
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