Debt Mutual Funds: Embracing An Altering Landscape

- Himali Patel

Every year, the mutual fund industry (MF) spends crore in advertisement business to make you understand the benefits of diversification, and how your money gets handled by a professional management. Although, it does not guarantee you that all your risk will disappear, or your mutual fund units would never slip below its net asset value (NAV) or for that matter any credit crisis will not take away your hard-earned investment money.

In March, 2019, the share of retail investors in debt and debtoriented products constituted 37 per cent of the total asset under management (AUM). The percentage is big enough to understand that there is a reason why investors have become more cautious and apprehensive about their investment in debt funds in the recent light of the unfolding of events.

Since the Infrastructure Leasing & Financial Services (IL&FS) crisis in September 2018, which defaulted on its debt obligations as they piled up too much debt by over borrowing through cheap short-term commercial papers (CP) for funding its long-term projects led to asset-liability mismatch. Some debt funds which got impacted largely post crisis, had a contagion impact on few companies in the non-banking finance companies (NBFCs) and housing finance companies (HFCs) space. This led to the overall sentiment turning sour along with the crisis of confidence with the investors.

Although a lot of trouble became unavoidable since April 2019, as many companies have either defaulted across few debt papers or have been downgraded by credit rating agencies (CRAs) which were held by some mutual fund schemes. The companies, which came under the scanner includes Dewan Housing Finance Corp (DHFL), Essel Group companies, Anil Dhirubhai Ambani Group companies (ADAG) and Yes bank (See table: Mutual Fund’s Exposure so far).