The redemption pressure and worsening liquidity issues took a huge toll on credit risk funds in April. Franklin Templeton Mutual Fund shut six of its schemes - including Credit Risk Fund. The funds of Franklin Templeton MF aggregating more than Rs 25,000 crore are said to have bitten the dust because of liquidity crunch.
This is evident from the returns data which indicated that credit risk funds were the worst performers in the month of April across all categories of schemes.
Credit risk funds delivered negative 4.44 percent average returns last month, according to Value Research, a mutual fund research firm.
Fund managers said the credit risk fund category has been reeling under the stress of redemptions as most of the fund houses had their underlying assets deployed in highly illiquid corporate bonds.The collapse of Franklin Templeton’s debt schemes has added to panic redemptions.
Credit risk funds invest in low-rated papers for higher returns. Many fund houses were forced to sell these papers to keep themselves afloat during the 40-day lockdown announced by the government to restrict the spread of the coronavirus.
According to the Association of Mutual Funds of India (AMFI), net redemptions under credit risk funds stood at Rs 2,949.49 crore as of April 24, a day after Franklin Templeton announced closure of its six schemes and peaked at Rs 4,294.36 crore as of April 27.
Other debt funds
Among other debt schemes, medium-,short- and low-duration funds also gave negative average returns in the range of 0.16-0.77 percent.
Just like credit risk funds, these three categories too had investments in high yielding papers impacting returns.
Heightened downgrades and defaults in many of the high yielding instruments, led to NAV hits.
A higher yield-to-maturity indicates higher returns, but at the same time there is higher risk.
The silver lining within the debt category were the gilt funds. Among all debt funds, gilt schemes were best performers 1.75 percent average returns. This was followed by Gilt: With 10 Year Constant Duration that offered 1.64 percent average returns.
Sharper-than-expected rate cuts and liquidity measures by the Reserve Bank of India (RBI) helped the category deliver positive returns.
Gilt funds invest primarily in government securities. These funds have no risk of non-payment of interest or principal amount but get affected by interest rate movements as the Government borrowing typically happens to be for a longer duration.
All equity funds gave positive returns in April.
Pharma funds were the best performers across all categories of schemes in the month of April.
The category delivered 23.58 percent average returns.
However, the category underperformed, S&P BSE Healthcare Index that went up by almost 25 percent during the review period.
Apart from the expectation of earnings revival and attractive valuations, the sector gained due to the exports of hydroxychloroquine from India to other countries, which is predicted as a potential cure for treating coronavirus.
Aditya Khemka, Fund Manager - DSP Healthcare Fund, said in a recent presentation that the improvement in business and ROE could lead to earnings growth and a sector rerating.
Pharma funds largely invest in pharmaceutical companies. It also invests in allied businesses such as hospitals, chemicals, healthcare services/diagnostics and financial services firms linked to this sector.
The second best performer was Equity: Thematic Energy with 17.82 percent average returns.
Other schemes such as large cap, large and mid cap and small cap schemes’ categories gave returns in the range of 11.76 percent to
13.58 percent average returns in April.
In April, amid intermittent bouts of volatility BSE Sensex ended the month with 16 percent gains.