There is genuine risk aversion. MFs are staying away from below-AAA rated securities
With lower-rated securities proving to be albatrosses on their necks, debt mutual funds (MFs) are increasingly playing it safe. Debt MFs are shunning securities issued by corporates and NBFCs (non-banking finance companies) and are increasing their exposure to G-Secs (government securities) and bonds issued by public sector units (PSUs).
Playing it safe
Debt MF holdings of G-Secs and PSU bonds as a proportion of their overall portfolio increased to 23.1 per cent in April from 21.2 per cent in February. It constituted only 17.2 per cent of the holdings in August last year. Their exposure to G-Secs alone has gone up to 8.6 per cent in April compared to 5.2 per cent last August. Fund houses now hold G-Secs to the tune of Rs 116210 crore, a 52.1 per cent surge in six months, data with market regulator SEBI showed.
In contrast, fixed-income MF holdings in corporate debt have fallen from 28.2 per cent in February (nearly Rs 432700 crore) to 26.9 per cent (around Rs 364420 crore) in April this year. Risk aversion was visible in the credit rating profile of instruments held by debt MFs. There was also a sharp churn in the quality of papers held, with the share of ‘sub-AAA’ rated securities in the portfolios of debt MFs falling from 41 per cent in September last year to 22 per cent in March 2020.
Incidentally, SEBI allowed fund houses to invest an additional 15 per cent of AUM (assets under management) in G-Secs and T-Bills (Treasury bills). These were allowed in corporate bond, banking & PSU debt, and credit risk funds from mid-May, after a representation from the industry body AMFI (Association of Mutual Funds in India). G-Secs are considered safe and liquid instruments.
From a high of 76 per cent around the IL&FS crisis in September 2018, the share of private sector paper (including that of NBFCs) is down to sub-60 per cent levels now. Debt MFs are large participants in the corporate bond market. But they have been reducing their exposure to corporates and are now focusing only on top-rated papers. Top corporates that borrow from MFs include those from telecom, oil and gas, power and mining sectors
Private NBFC papers shunned
Private sector NBFCs have recorded the sharpest fall in their share in debt MF industry AUMs (assets under management). The share of private sector NBFCs started declining in the portfolios of debt funds after the IL&FS crisis.
The absolute holdings of private sector NBFC paper have fallen 42 per cent in the last 18 months. But holdings in PSU NBFCs have risen 38 per cent during the period. While the overall NBFC borrowing from MFs has fallen 17 per cent since the ILFS crisis, ‘sub-AAA’ rated papers have plunged 26 per cent.
The winding up of six debt schemes of Franklin Templeton MF in April this year has cast a shadow on the corporate bond segment, with fund managers choosing to buy higher-rated paper. “There is genuine risk aversion. The tendency to stay away from below-AAA rated securities is high among the MF fraternity now,” says Lakshmi Iyer, chief investment officer-debt and Head-products, Kotak Mahindra MF. “G-Sec is a highly liquid asset. Since a lot of inflows are coming into gilt funds (that invest in G-Secs), their share (in MF portfolios) has gone up,” she says.
“The focus on returns has taken a back seat. The general mood is towards safety and security,” says D P Singh, executive director, SBI MF. “Since defaults of payments in securities issued by corporates have gone up in recent months, fund houses are no longer interested in taking risks,” he adds.
“With repeated credit and liquidity events impacting the mutual fund industry, we suspect this pressure on fund supply from this source (fund houses) for corporates could remain,” according to analysts led by Sunil Thirumalai of Emkay Global Financial Services.
What should you do?Investors should stick to banking and PSU debt, corporate bond and short-duration funds that hold securities with good credit rating profiles. Also, check for below-AAA rated securities in your funds’ portfolios. If there is high concentration of lower-rated paper in the portfolio, then it is advisable to avoid such funds. The other factor you should keep in mind while picking your debt fund is your time horizon. Match your goals’ horizon with the underlying funds’ duration. Engage with your advisor more and ask questions. Don’t panic and stay away completely from debt MFs. Staying away from debt funds is not advisable. A good understanding of the products helps in tempering our returns expectations.