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Debt Funds Abhi Bhi Sahi Hai? (Or do we get back to the traditional alternatives?)
May 7, 2019

A quick update on the debt market fiasco and the way forward for our Investors.


Author : iFAST Research Team



Our Fixed Income investors have been going through a fairly rough roller coaster ride since September 2018. The volatility being faced is not something that any of us would have anticipated in the Fixed Income space, even though it is very common to go through such loss of valuations when dealing with equity based funds. It has now started to seem like the bad news is never ending, and we continue to see reports of downgrades of companies where our funds are invested. Investors are rightly wondering what is the next best thing to do with their current investments and the way forward for their future ones.

The Story So Far

The debt market woes started in September 2018 with the short term rating for IL&FS Financial Services, the wholly-owned subsidiary of Infrastructure Leasing and Financial Services Limited (IL&FS), one of India's leading infrastructure development and finance companies, being downgraded from A1+ to D on account of irregularities in repayments to creditors, including mutual funds. A few of the debt funds with exposure to this paper were impacted as they had to take a mark down on the respective NAVs. This was followed by more troubles in other corporates like DHFL, Essel Group and Reliance ADAG Group of Companies. As we write this note, the latest downgrade has been Reliance Commercial Finance and Reliance Home Finance, with their papers being rated down from CARE BBB+ to CARE C / D. All of these have meant that the NAVs of the funds that had invested into these papers had to be marked down, and this has, in turn, impacted the returns.

Way Forward for our Investors

The current turmoil in the debt market has shaken the confidence of our investors as we are talking about surplus that was moved from Savings Accounts and Fixed Deposits into debt mutual funds. It will thus take some more time before they hum "Mutual Funds Sahi Hai" again, especially with respect to debt funds.

We still believe it is the right anthem, however, especially when it comes to the capability of the investment vehicle to meet both, short term and long term goals. We discussed the situation with the fund managers of the affected funds, who gave us the confidence that they are in active talks with the affected corporates to work out a solution. As of now, we would advise our investors to hold on to their existing investments; we will study the data on the April and May portfolios of the funds to give any further call there.

Advice on Fresh Investments

For investments being made for less than a year, we are recommending funds from IDFC Mutual Fund and Canara Robeco Mutual Fund. Both fund houses have steered away from exposure to any of the troubled papers.

For investments with a time horizon of 1 year to 3 years, investors can look at any of our corporate bond funds. In this space, we are also advising our investors to diversify their exposure by directly investing into highly rated Non-Convertible Debentures (NCDs) and corporate Fixed Deposits. These are definitely not without risks though, since even the best rated paper can be downgraded to D in a single month as shown by the IL&FS fiasco. However, going by fundamentals rather than ratings, we are comfortable vouching for a few corporate FDs and NCDs who have reputed promoters with a good track record of repayments and, of course, strong balance sheet numbers. We would recommend that investors invest into these for conservative returns, and be clear that the intention is not to chase higher returns.

Reach Us for Further Queries

We are sharing an excel sheet along with this note that lists the exposure of all the debt and hybrid funds in the industry into the troubled papers. We will also be happy to answer further queries that you may have about how these papers are impacting specific funds. You can reach us at research.ind@ifastfinancial.com

Watch this space as we get back to you with more updates on the evolving scenario in the Debt Market.

 

 

Disclaimer

ifast and/or its content and research team's licensed representatives may own or have positions in the mutual funds of any of the asset management company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. this article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. no investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. the value of mutual funds and the income from them may fall as well as rise. opinions expressed herein are subject to change without notice. please read our disclaimer on the website.


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