Credit risk erosion likely to weigh on debt business of mutual funds

The sharp erosion in assets managed under credit risk funds is likely to lead to cut in incomes in the debt business of mutual funds (MFs).

“Among the debt basket of products, credit risk funds fetch higher management fee. However, following the Franklin Templeton MF episode, the category has seen sharp erosion of assets,” said a senior executive of a fund house.

According to the data from Association of Mutual Funds in India (Amfi), at the end of June, credit risk funds managed Rs 29,423 crore of assets, which was 53 per cent less than the assets managed at the end of December last year.

“Across the industry, there has been a shift from higher fee-yielding credit risk funds toward lower fee-yielding debt products,” said Srikanth Matrubai, chief executive officer of Sri Kavi Wealth.

Credit risk funds usually fetch between 1.5 per cent and 1.9 per cent expense ratio, depending on the fund house and size of the scheme.

The total expense ratio (TER) structure laid down by the Securities and Exchange Board of India (Sebi) allows higher TERs on smaller-sized schemes.

“Investor sentiment towards credit risk funds is unlikely to revive in the medium term. Over the next eight-nine months, there will be risks of downgrades and defaults, keeping investors wary of this category,” said an MF advisor.

The category has continued to see redemption pressure, even though the quantum of net outflows has eased.

In June, credit risk funds saw net outflows of Rs 1,493 crore, as against Rs 19,238 crore in April when Franklin Templeton MF announced winding up of six of its schemes.

The reduction in the asset base of credit risk funds comes at a time, when the industry’s overall share of equity:debt mix has been tilting towards the latter.

“This will have a drag on the overall earnings profile of the industry as equity schemes typically fetch higher fees than debt products. However, one must bear in mind that the MF industry has shown resilience and grown assets over the last several years despite various challenges,” said Joydeep Sen, a consultant at Phillip Capital.

According to industry estimates, the share of equity in the industry’s overall asset mix stood at 36.5 per cent in the June quarter, as against 38 per cent in the corresponding quarter last year. The share of debt and liquid schemes stood at 54 per cent in the June quarter, as against 51.7 per cent in the corresponding quarter last year.

The balance 9.34 per cent (for June quarter) was accounted for by other scheme categories.