Debt funds, especially the credit risk category, that are stuck with securities of non-banking finance companies (NBFCs) have got some relief today. While announcing the latest round of relief measures to fight the COVID-19 crisis, the Reserve Bank of India’s (RBI) governor Shaktikanta Das laid out steps for sectors desperately looking for cash – NBFCs and micro-finance institutions.
What has changed?
In the second round of targeted long-term repo operations (TLTRO) announced today, Das said that out of the of Rs 50,000 crore to be made available to banks, 50 per cent must be used to buy bonds of mid and small-sized NBFCs and MFIs. The funds taken under the TLTRO need to be deployed in one month. In the first round, the money that was made available to banks was meant for buying bonds of public sector undertaking and large companies.
This will create a liquid market for such bonds. Mutual funds and other institutional investors holding on to these bonds can now sell these and raise cash as many debt funds, especially credit risk schemes, have been facing redemption pressure.
“Targeted liquidity infusion to NBFC and MFI sector should ensure that the prices of the bonds issued by companies in these sectors see some stability going forward,” says Sujoy Kumar Das, head- fixed income, Invesco Mutual Fund.
“The requirement of deploying funds availed under the TLTRO within one month, ensures that the banks act swiftly and yields go down on bonds issued by NBFCs and MFIs,” says Kunal Valia, Mumbai based independent investment analyst.
RBI has also earmarked an additional Rs 50,000 crore for advances to National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI) and National Housing Bank (NHB) at the policy repo rate (4.4 percent ). This means the existing bonds issued at higher rates would be in demand, which could lead to a rise in prices of these securities (existing ones). Debt funds holding on to such bonds will benefit.
RBI has also cut the reverse repo, the rate that RBI pays to the banks- to 3.75 per cent. A side-effect of this move could be that banks would invest in bonds. This will bring down the yields on traded bonds and government securities.
What should you do?
“RBI’s action has made it clear that the regulator can step in if additional liquidity is required. Infusion of liquidity targeted at mid and small-sized NBFCs and MFIs should cap the spiraling yields on lower-rated investment grade bonds,” says Valia.
Avoid credit risk funds for some time as they are still a risky proposition. Valia recommends investing in funds that hold high-quality bonds (AAA and AA+) with 1-3 years portfolio duration.
In future, the RBI is expected to maintain ample liquidity in the financial markets. “The rates should go down in line with falling inflation. Given the extent of economic standstill, we should see much lower interest rates going forward,” says Das.
Investors need to stay cautious and avoid chasing yields. Do not expect a return of more than 100 to 150 basis points over and above the inflation rate from your debt fund. A basis point is one-hundredth of a percent point.
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