Due to the NBFC crisis, fund houses have become cautious in their debt investment strategy and are majorly investing in safe instruments.
The exposure of mutual funds into the various debt instruments of the NBFC sector has declined while the exposure of corporate debt paper saw a notable increase in October.
According to a report by CARE Ratings, exposure of mutual funds to non-banking financial company (NBFC) stood at Rs 1.86 lakh crore in October 2019, a drop of Rs 79,000 crore since July 2018, when the NBFC crisis surfaced.
While the amount has reduced, the percentage share also declined from 19 percent in July 2018 to 12.8 percent in October 2019.
Typically, the financial services sector, including NBFCs and housing finance companies (HFCs), have been the largest borrowers from mutual funds.
After the liquidity crisis triggered in the NBFC space, MFs withdrew 43 percent of their investments from this category.
A slew of credit default cases, including at IL&FS and DHFL, have led to MFs suffering huge losses.
The percentage share of funds deployed by MFs in CPs of NBFCs in October 2019 fell to 6.2 percent of debt AUMs (lowest since July 2018) and the amount held declined to Rs 9,000 crore.
Mutual funds attributed the fall in NBFC exposure to ongoing liquidity crisis in the space and also to the reduction in sectoral exposure limits by The Securities and Exchange Board of India in NBFC forcing MFs to pare their investments.
SEBI directed mutual funds to reduce exposure to NBFCs from 25 percent to 20 percent.
Last month, the largest proportion of debt assets were invested in corporate debt papers.
The fund houses invested worth Rs 4 lakh crore in the corporate debt segment that includes floating-rate bonds, non-convertible debentures, among others.
Compared with the previous month, assets in corporate debt segment category improved marginally by Rs 3,100 crore; however, in percentage terms, it declined to 27.4 percent of debt AUMs.
Currently, the debt AUM of the mutual fund industry stands at Rs 16 lakh crore.
CPs,CDs
The highest share (47 percent) of debt assets under management were deployed in short-term instruments with a maturity of less than 90 days.
This was followed by a share of 33 percent in long-duration instruments with a maturity of one year and above, 11 percent in 90-182 days and 9 percent in 182 days-1 year.
The second-highest category in which debt AUMs invested their money was commercial Paper (CPs) with Rs 3.45 lakh crore.
CPs are short term money market instruments issued by large corporate to borrow for up to a year. Maturities on commercial paper rarely range longer than 270 days. Money raised via CPs are typically used for the financing of accounts payable and inventories and meeting short-term liabilities.
When compared with September 2019, this segment witnessed a growth of Rs 2,700 crore, but the percentage share dropped to 23.6 percent of debt AUMs.
Funds deployed in bank certificates of deposit (CDs) stood at Rs 1.54 lakh crore in October, registered a drop of Rs 733 crore over the previous month.
G-secs
In the last month, investments in government securities or G-secs stood at Rs 89,000 crore, a rise of Rs 14,000 crore over September 2019.
Since G-Secs are issued by the government, it makes them the safest form of investment (as far as credit quality is concerned; though they are more liquid and therefore volatile). Also, falling interest rates benefit debt funds, but particularly long duration funds.
Further, SEBI has told fund houses that liquid funds must invest at least 20 percent in liquid assets like government securities have prompted mutual funds to increase the exposure to G-secs.
Currently, 42-mutual funds manage Rs 26.3 lakh crore of assets under management (AUM).
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