Stuck In Quicksand

Debt funds are in the line of fire for missing the danger signals and eventually falling prey to defaulting securities.

- Kundan Kishore

Debt funds are fast losing sheen as they draw fire for falling prey to defaulting securities. A host of negative incidents such as fixed maturity plans (FMPs) not paying full maturity amounts, and erosion of debt funds’ NAVs have put a question mark on their stability. This also makes them a weak link in the chain.

The past 8-9 months have been particularly brutal for the debt mutual fund (MF) schemes, which manage 11.63 lakh crore, due to a series of defaults in the Indian bond market. This is cause for serious concern as, according to Association of Mutual Funds in India (AMFI) March data, income funds and liquid funds together make up as much as 48 per cent of the 24 lakh crore Indian MF industry. Any trouble will have a far reaching effect.

The trigger point was when IL&FS, which had a debt of $13 billion (about 91,350 crore), defaulted on some of the repayments in September 2018. The dust had barely settled when rumours of a liquidity crisis at Dewan Housing Finance (DHFL) led to a steep fall in its share price. Following this, concerns regarding Essel Group’s repayments cropped up, which led fund houses to default on their redemption proceeds and push forward maturity dates.

The latest among the series come from Anil Ambani’s Reliance Group entities, Reliance Home Finance and Reliance Commercial Finance, which have been downgraded to below investment grade. This has thrown a shadow on MFs’ exposure of about 2,500 crore to them. Other large companies in trouble include DHFL, Essel Group and Yes Bank.