Fisdom Weekly Update (Issue #19): The worry in debt markets and your portfolio!

In recent times, debt funds have proved that they are not without risk. This entire slew of events began right after the IL&FS fiasco was brought to light.

Key events included:

• On January 22, CRISIL has downgraded its rating on the non-convertible debentures (NCDs) of Jharkhand Road Projects or JRPICL to ‘CRISIL D’ from ‘CRISIL BB(SO)/Watch Negative’.
• Essel Group founder Subhash Chandra gave a scare to markets after he came out with a letter post the 26% crash in Zee Entertainment shares, apologising to bankers, NBFCs and mutual funds for not “living up to expectations”.
• The sharp fall in shares of some Zee companies added to the debt funds’ woes as they were the backing of securities in which many debt funds had invested in.
• Care ratings have downgraded over Rs. 1 lakh crore worth of debt issued by the country’s third largest housing finance firm DHFL.

The biggest investors under pressure were mutual funds.

Are mutual funds in any position to mitigate such risk?

Most debt instruments (especially issued by NBFCs) held by mutual funds are collaterals to equity. Mutual funds have the option to sell & encash these instruments to limit the fund’s losses.

Why did mutual funds not sell these instruments immediately?

Quoting A Balasubramanian, chief executive officer, Aditya Birla Sun Life Asset Management Co. Ltd – “Selling the shares would have deepened the crisis instead of solving it.” He told while commenting on his exposure to Essel group exposure.

How are you placed in such a scenario?

The continuing defaults in credit rated papers specifically across NBFCs is a wake-up call for investors and hence as a proactive measure, we have already sent a rebalancing notification to all affected investors. If you haven’t received any, that means you portfolio has no to negligible exposure to these papers.We continue to track portfolios holding instruments issued by entities associated to the affect companies.

Rest assured, we are continuously monitoring the funds & your portfolio.

Are mutual funds in any position to mitigate such risk?

Most debt instruments (especially issued by NBFCs) held by mutual funds are collaterals to equity. Mutual funds have the option to sell & encash these instruments to limit the fund’s losses.

Why did mutual funds not sell these instruments immediately?

Quoting A Balasubramanian, chief executive officer, Aditya Birla Sun Life Asset Management Co. Ltd – “Selling the shares would have deepened the crisis instead of solving it.” He told while commenting on his exposure to Essel group exposure.

How are you placed in such a scenario?

The continuing defaults in credit rated papers specifically across NBFCs is a wake-up call for investors and hence as a proactive measure, we have already sent a rebalancing notification to all affected investors. If you haven’t received any, that means you portfolio has no to negligible exposure to these papers.We continue to track portfolios holding instruments issued by entities associated to the affect companies.

Rest assured, we are continuously monitoring the funds & your portfolio.

OPEN MYWAY WEALTH APP

If you have any concern, please write to us at ask@fisdom.com or call at +080 48039999, we would be happy to answer your query.

Thanks,
Nirav (Head of Research)
Fisdom