IL&FS crisis: Debt plan investors should thoroughly check fund's portfolio

The series of defaults by Infrastructure Leasing & Financial Services (IL&FS) has hurt debt funds (see returns table). Worse, with funds like DSP Investment Managers selling the debt papers of Dewan Housing Finance, despite no apparent problem in the company, there is palpable fear among investors and debt-fund managers.
 
Says Pankaj Pathak, fund manager, fixed income, Quantum Asset Management Company: “The IL&FS incident should be seen along with many such instances in the past few years wherein sudden credit rating downgrades or defaults by companies like Amtek Auto, Jindal Steel & Power (JSPL), and Ballarpur Industries impacted debt mutual funds. What is more worrying are the repeated instances of liquid funds being impacted by these kinds of defaults. These events contradict the very nature and purpose of a liquid fund.”
 
But Pathak is quick to advise that investors in debt funds should not panic. Typically, investors in liquid and short-term funds are high net-worth individuals or ones getting advice from a private wealth management company. They should go by the advice they receive regarding whether to invest more or exit. The good news is that the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) have committed that there will be sufficient liquidity in the system.

 

Mahendra Jajoo, head, fixed income, Mirae Asset Global Investments, feels it is a classic case of a cognitive bias situation. “Just because there is one default, people think everything will fail. That is unlikely to happen. So my advice to investors is to be cautious and evaluate their portfolio and not to get into wholesale panic. So if they have money, they should look at high-quality portfolios, and buy at a good rate,” says Jajoo. According to him, most funds have taken the full impact of IL&FS on their net asset values. Unless there are defaults by other companies in the NBFC segment, things may not go haywire for debt funds. A liquidity infusion by the promoters of IL&FS could soon calm the waters.
 
Nilesh Shah, managing director, Kotak Mutual Fund, says since the overall outstanding debt of IL&FS is huge and its structure is complex with more than 200 subsidiaries, even asset restructuring companies would need time to do due diligence. There are fears that if the company goes to the National Company Law Tribunal (NCLT), there could be more delays in repayments and investors may have to take haircuts.
 
What is more worrying is the high exposure of mutual funds in NBFCs. As a Credit Suisse report pointed out on Monday, mutual funds’ exposure to NBFCs through short-term commercial papers has risen three times since 2016. And as of March 2018, mutual funds held an estimated 60 per cent of the outstanding commercial papers of NBFCs. As a debt-fund investor, it could be a good time to do a thorough check of your debt fund’s portfolio. If there is an excessive exposure to NBFC stocks, you should check with your fund manager about his plans to deal with the situation.
 
In times like this, experts say investors should understand there is credit risk in this space. On their part, they need to do a more thorough study of where they are investing and should understand the risk-reward between different investment styles.

Rajiv Shastri, director, and chief executive officer, Essel Mutual Fund, says "Redeeming at this point may mean exiting at a market low with undeserved losses. Investors who remain patient stand to gain the most from the current scenario."