The approach to assessing the credit risk of a debt fund is to check the credit ratings of the securities present in the portfolio. This aspect is well known. But apart from credit rating, there is another parameter to gauge the risk in a debt instrument – the yield.
In general, the market seeks to convey that a higher yield means higher risks, because people buying the instrument expect a higher compensation. When you see an unusual upward movement in the yield of an instrument (yield and price move inversely), it means that the market’s trying to indicate some news flow or event concerning the issuer of the instrument.
The new approach
Now, the question is, where would you get the data on yields? Price data is easily available for indices such as the Nifty or Sensex or large/mid-cap stocks. Traded yields are available live for Government Securities on CCIL NDS. However, the corporate bond market is not so liquid and price or yield data is not readily available. Only people who are in the thick of things – bank treasuries or MF fund managers – would be aware of it. If data is not available, then what is it we are talking about? On July 22, 2020, market regulator SEBI released a circular stating that with effect from October 1, 2020, portfolios of debt mutual fund schemes have to be disclosed on a fortnightly basis within five days of every fortnight. In addition to the current portfolio disclosure, the circular also asks for the yields of the instruments to be disclosed. It is only a one-line statement, but is significant from the perspective of our discussion.
There are certain exposures about which we have full confidence – Government Securities or blue-chip companies. These apart, there would be certain firms or instruments rated AA or A, or certain unknown names, e.g., securitized debt or LAS deals. Now that we are in October 2020, fortnightly disclosures of debt fund portfolios will start, along with yield levels of the instruments. For any exposure that is questionable or you don’t have full confidence in, you can track the yield level. When there is a sharp spike in the yield level, it would be a signal for you. It may not mean that you have to exit the fund right away, but it is a tracking mechanism nonetheless.
Limitations of going by yields
While the yield level disclosed on the fortnightly factsheet would give you a number and you can compare figures every two weeks, fluctuations may be due to reasons other than deteriorating fundamentals. For example, there may be an NBFC rated AA, valued at 10 per cent yield on one fortnight, which may go up to 10.5 per cent subsequently. Going by this approach, it would be a red flag. However, it may be due to generic reasons such as overall upward movement in yields in the market or general market aversion for a sector.
Or, it could be due to any technical factor; for example, recently, when SBI issued AT1 (additional tier 1) Perpetual Bonds in the primary market, the secondary market yields reacted and rose and are trading at levels higher than certain other AT1 Perpetual Bonds in the secondary market. This is not a comment on the fundamentals of SBI, but the primary issue had to be at a level attractive enough to make the issue a success, given the quantum, and consequent reaction in the secondary market.
Conclusion
In spite of the limitations, this is a new perspective for advisers / distributors / savvy investors, apart from the established approach of going by the credit rating alone. Sometimes, there are lags between events taking place in a company and a rating agency downgrading its securities. That is the time for closely tracking the change in yield levels. On the specific reason for change in yield level of a bond, you may make enquiries with the fund house.
(The writer is a corporate trainer (debt markets) & author)
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
