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 1.83 lakh crore in November 2019, a drop of Rs 81,867 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 12.3 percent in November 2019.
Typically, the financial services sector, including NBFCs and housing finance companies (HFCs), has been the largest borrowers from mutual funds.
A slew of credit default cases, including at IL&FS and DHFL, has led to MFs suffering huge losses.
The report revealed that investments in CPs (Commercial papers) of NBFCs are on a consistent decline every month.
After the liquidity crisis triggered in the NBFC space, MFs withdrew 45 percent of their investments from this category.
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 (SEBI) in NBFC forcing MFs to pare their investments.
SEBI directed mutual funds to reduce exposure to NBFCs from 25 percent to 20 percent.
In November, the largest proportion of funds of debt AUMs were invested in corporate debt paper
The fund houses invested worth Rs 4.07 lakh crore in the corporate debt segment which includes floating rate bonds, non-convertible debentures, among others.
Compared with October, assets in this category improved by Rs 6,711 crore. However, in percentage terms, it declined marginally to 27.3 percent of debt AUMs.
Currently, the debt AUM of the mutual fund industry stands at Rs 13.53 lakh crore.
The second highest category in which debt AUMs invested their money was Commercial Papers (CPs) with investments of Rs 3.37 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.
Currently, 42 mutual funds manage Rs 27.05 lakh crore of assets under management (AUM).