After Amtek, firms dig deeper into past, profile of funds

Stung by the Amtek Auto episode, Corporate India is taking additional precautions while investing in debt schemes of mutual funds. Investors are now looking at the net worth and profitability of a fund house and digging deeper into the credit profile of individual schemes before making an investment decision.

“Besides performance, investors in fixed income schemes are now looking at the net worth of the AMC, its profitability, the scheme’s size and its liability profile,” said Himanshu Vyapak, deputy CEO, Reliance AMC.

The official of a large corporate house says that his firm first selects the AMC by looking at the AUM, net worth, long-term profitability and the quantum of promoter investment. It then selects the scheme by assessing the credit portfolio. “Corporates are now making it a point to interact directly with the fund managers, especially for investments in short-term bond funds and duration products. Also, while the overseas AUM of foreign fund houses was considered a comfort factor earlier, that’s no longer the case now,” said the official, adding that the firm invests in fund houses with a minimum net worth of Rs 100 crore.

At the end of March 2015, nine fund houses had a net worth less than Rs 50 crore and 25 had a net worth of less than Rs 100 crore. In 2014, Sebi had hiked the minimum net worth criteria for mutual funds to Rs 50 crore from Rs 10 crore. For FY15, 17 of the 42 fund houses posted net losses.

“Investors want more granular data now and are looking at the composition and concentration of investors more closely,” said Manoj Napgal, CEO, Outlook Asia Capital. For example, investors want to know if the institutions invested in a particular scheme belong to the same sector. “Investors from the same sector will have similar views on the market and can potentially exit at the same time,” he said.

Investors are also looking at the consolidated exposure of a scheme to a group company and whether the exposure to a particular company is merit-based. “A lot of investment in group companies happens because of the promoter’s personal guarantee. This is where the maximum junk is created in the debt portfolio. While none of these investments have gone bust, investors are questioning fund managers on their investment rationale,” said Nagpal.

However, experts believe that selecting fund houses based on their net worth and profitability may not prove useful as mutual funds are a pass-through vehicle and fund houses were told by Amfi not to absorb losses about a year ago.

In January, the Securities and Exchange Board of India (Sebi) announced tighter norms for investment in debt securities, reducing single security exposure, sector exposure and group exposure. The limit of investment in securities sold by a single company was reduced to 10 per cent from 15 per cent of the net asset value, or NAV, of the scheme, while the single sector exposure for a scheme was reduced to 25 per cent from 30 per cent. The exposure to housing finance companies within the finance sector has been reduced to five per cent from the earlier 10 per cent.

Market regulator Sebi has reportedly put mutual funds' exposure to distressed bonds, especially those downgraded by rating agencies, under scanner. Recently, rating agency Crisil downgraded JSPL’s long-term rating from BBB+ to BB+ with a cautionary note that the group's liquidity would deteriorate significantly in the near-term.

BEING CAREFUL

• Corporate India now looking more closely at net worth, AUM and profitability of fund houses before investing in debt schemes
   
• Companies now directly interacting with fund managers to assess strategy and scheme risks
   
• Consolidated exposure of a scheme to a group company under scanner
   
• Debt funds come with various risks such as interest rate risk, credit risk, duration and liquidity risk
   
• It is not possible to avoid these risks completely
   
• JP Morgan MF had exposure of nearly Rs 200 crore through two of its debt schemes to Amtek Auto's non-convertible debentures when the papers were downgraded by rating agencies
  

 

In January, Sebi tightened norms for debt investment, reducing single security, sector and group exposures