Covid triggers mutual crisis
Redemption woes : Investors have withdrawn ₹9,000 cr from credit risk funds.Updated: Apr 30, 2020 06:30 IST
Panicked investors have pulled a staggering ₹9,000 crore out of credit risk funds in just three trading days since Franklin Templeton India decided to shut down six of its debt schemes.
Assets under management (AUM) of credit risk funds have dropped 19% in the three trading days to April 28, according to data compiled by Pulse Labs, a mutual funds data providing firm. That compares with ₹5,569 crore of outflows, or 10% of the total AUM, in March, which typically sees higher redemptions because of year-end sales by firms.
The credit risk fund category has been under tremendous stress of redemptions because its underlying assets are highly illiquid corporate bonds, many of which are sold by companies struggling to keep themselves afloat during the 40-day lockdown announced by the government to limit the spread of coronavirus. The collapse of Franklin Templeton’s debt schemes has added to panic redemptions.
To be sure, some of the outflows are also a result of write downs, such as the one undertaken by Aditya Birla Sunlife Mutual Fund for its exposure to an Infrastructure Leasing and Financial Services Ltd (IL&FS) special purpose vehicle.
“In general, all credit funds have seen outflows. If you run the number for the industry, you will figure it out; the industry loss is very high,” said A Balasubramanian, chief executive of Aditya Birla Sunlife Mutual Fund.
The AUM of credit risk funds at the end of March was ₹55,380 crore. That has dropped to ₹40,000 crore as of Tuesday.
Medium-term funds, a type of debt mutual fund that invests in debt and money market instruments, also saw an AUM drop of ₹2,361 crore over the three days, a roughly 10% drop. Many of these funds hold low quality, illiquid papers as well.
The biggest drop in AUMs in absolute numbers was seen in the credit risk funds of the large asset management companies (AMCs).
HDFC Credit Risk Fund lost ₹2,483 crore in three days, ICICI Prudential Credit Risk Fund saw outflows of ₹1,973 crore, Aditya Birla Credit Risk Fund lost ₹1,005 crore and Kotak Credit Risk Fund ₹1,105 crore. Fund managers say that the panic is unwarranted.
“Investors are redeeming money without adequate consideration of portfolio quality. In our case, we have not had to sell a single AAA asset to meet redemptions,” said Lakshmi Iyer, chief investment officer (debt), Kotak Mutual Fund.
In an emailed statement, ICICI Prudential said that across various fixed income funds, more than 80% of its exposure is in AAA rated papers. It also said that in the past few months, it has shored up liquidity and have no borrowings across the schemes.
“We reiterate our credit risk fund portfolio is well diversified both on the asset and liability sides. On the asset side, by having per instrument/per group exposure limit which is at 80 different securities with average exposure of around 1.25% to each individual issuer (data as on 31 March),” said a spokesperson for ICICI Prudential.