Mutual funds schemes holding bonds issued by Yes Bank are expected to mark them down and may create segregated portfolios in case rating agencies downgrade the rating of such instruments to below-investment-grade (BBB).
Will your investments get impacted?
According to Value Research data, as of January 31, 2020, 31 schemes held bonds issued by Yes Bank, totally valued at Rs 2783 crore. Five schemes of Nippon India Asset Management Company (NIAMC) have Rs 1770 crore invested in the securities of Yes Bank.
In terms of exposure to Yes Bank at a scheme level, Baroda Treasury Advantage (26.87 per cent), Nippon India Strategic Debt (22.8 per cent) and IDBI Credit Risk (12.09 per cent) funds top the chart. These numbers are as per the month-end filing of mutual funds for January 2020. This may have changed if any fund house had sold its investments. For example, Mahindra AMC has confirmed that its Mahindra Credit Risk Yojana has no exposure to Yes Bank bonds as on February 28, 2020.
Marking down the exposure
The largest investor in Yes Bank bonds among mutual funds, NIAMC, has announced that it has marked down the value of investments in Yes Bank to zero. Put simply, the net asset values of the schemes of NIAMC holding Yes Bonds stand reduced to the extent of its exposure to the bonds. NIAMC has also restricted subscription to the schemes having exposure to Yes Bank bonds to Rs 2 lakh.
Mutual fund houses also have the option to carve out the bond exposure to Yes Bank. The financial market regulator – Securities Exchange Board of India has allowed the fund houses to create segregated portfolios if the rating of a bond falls below the investment grade – BBB. As of now, there is no communication from rating agencies pertaining to the credit rating of Yes Bank, which currently stands at BBB. No AMC so far has segregated the portfolio. Nippon India AMC's spokesperson said, "While Yes Bank exposure has been marked down to zero, no segregation has been done. Segregation or side-pocketing is allowed only if SEBI-defined triggers take place."
If the credit rating is downgraded and fund houses choose to create segregated portfolios, then investors will be the allotted the same number of units of the segregated portfolios as they hold in base scheme. Both the units will have net asset values and the investors can transact in the units of base scheme. Though segregated portfolios are listed on the stock exchange, they seldom trade. Investors cannot sell them back to the AMC. Investors of the segregated portfolios are paid when the AMC recovers its dues from the issuer.
What should investors do?
There is little that you can do with your existing investments in the schemes holding Yes Bank bonds, as the damage has already taken place. Ashish Shanker, head – investment advisory, Motilal Oswal Private Wealth Management expects fund houses to announce side pockets (segregated portfolios) in the affected schemes. "As more clarity emerges on the resolution plan of Yes Bank, investors will get more clarity about the future of their troubled investments. For the time being, investors should hold on to their investments. After the segregated portfolios are created, investors can exit the units allotted in base scheme," Shanker adds.
Deepak Chhabria, founder and managing director of Axiom Financial Services says, “The writing was on the wall for a long time when it comes to Yes Bank. Despite that the funds are seen holding on to its bonds. Mutual funds scored low on risk management in this case. Liquidity of these bonds has been low in the secondary market and the same needed to be factored in by the fund managers at the time of investments."
As the economy is slowing down and there is a lot of uncertainty in the global markets after the Corona Virus epidemic, mutual fund investors need to exercise caution. Chhabria advises steering clear of all credit-risk funds. He recommends investments in liquid , overnight and banking & PSU bond funds that invest in short-term papers, till the dust settles.
For fresh investments in bond funds, Shanker recommends sticking to high credit quality options such as banking and PSU and corporate bond funds, given the elevated risks in the financial markets.If your MF account is linked to Yes Bank, change to a different bank while redeeming units. You can update details of a new bank account online by submitting a copy of a cheque. You also have the option of updating your new bank account details offline by filling a form.Not sure which mutual funds to buy? Download moneycontrol transact app to get personalised investment recommendations.