Check the factsheet regularly if you are invested in debt and balance funds

Many mutual fund investors are worried about their investments in debt mutual funds as the interest rate and credit risk worries gather momentum, especially those practising DIY ( Do-It-Yourself ) investing.

“New investors are trying to enter the debt/balance segment and investors who manage their portfolios by themselves have started wondering how they can safeguard their debt/balance fund investments. “There are no rules to eliminate the risk, but investors can try to minimise risk.” 

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Know the categories well :

We believe that if you are a DIY ( Do-It-Yourself ) investor, the least you should do is keep a check on where your schemes are investing. Fund houses send a factsheet on your registered e-mail id every month. “You should see the changes in the factsheet. Which instruments have been added to the scheme and which have been dropped? Educate yourself if you are doing it yourself.”

Quality of the portfolio :

Higher-rated instruments have lower chances of defaults. Check if your scheme portfolio is betting on lower-rated securities to earn better returns. “The allocation changes and the ratings of the instruments added in the portfolio should be monitored. AAA-rated securities have a rare chance of defaulting. An IL&FS type default is very rare in the market.”

Duration of the instruments :

Another risk that you want to refrain from taking is the interest rate risk. When the interest rates go up, the longer duration bond funds are hit the most and vice-versa. Mutual fund investors who do not want to take calls on the interest rate movements can opt for dynamic bond funds. “Duration funds or bond funds are susceptible to interest rate changes. Investors who do not want to take such risk should bet on schemes that hold lower maturity papers like short and ultra-short duration funds.”

Note: Mutual fund investments are subject to market risks read all scheme related documents carefully.

DISCLAIMER:

No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here.

 

Provident funds investment in IL&FS bonds have no government guarantee: FinMin

The provident and pension fund trusts that invested in the IL&FS bonds now fear a loss of money as the debt-ridden company`s bonds are unsecured debt, and the Finance Ministry says superannuated bonds do not carry any government guarantee and all such instruments have to face all market-related risks.

“Since these are investments in bonds, the government does not ensure any guarantee on them as such and if these are invested in stock markets, they carry the market risks as applicable. It is between the bond issuer and bondholders…,” the Finance Ministry said in response to IANS queries.

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Thousands of crores of money of more than 15 lakh employees of both public and private sector companies have exposure to IL&FS bonds.

However, queries sent to the EPFO Commissioner and Labour Minister Santosh Gangwar remained unanswered.

Over 50 funds that manage retirement benefits of over 15 lakh employees have exposure to IL&FS. PF trusts of state electricity boards, public sector undertakings (PSUs) and banks are among them. The provident and pension fund trusts have filed intervening applications in the National Company Law Appellate Tribunal (NCLAT) stating that they stand to lose all the money since the bonds are under unsecured debt.

Usually, retirement funds have a low-risk appetite and invest in “AAA” rated bonds (which IL&FS bonds used to be once upon a time) and get assured returns with low-interest rates.

The worries of pension and provident fund trusts come from the classification of IL&FS profiling its companies as to which can meet the dues obligations. Many important trust managing funds of PSUs like MMTC, IOC, Hudco, SBI and IDBI are among those filing petitions. From the private sector, HUL and Asian Paints are among the petitioners.

IL&FS is currently under resolution process at the National Company Law Tribunal (NCLT). The process will decide under Section 53 of the IBC the order of priority for distribution of proceeds of the process.

The beleaguered company has informed the NCLT that of the 302 entities in the group, 169 are Indian companies, out of which only 22 are emerging as those which can meet all obligations (green), while 10 firms can pay to only secured creditors (Amber). There are 38 companies of IL&FS (red) which cannot meet any obligations of payment, and 120 entities are still being assessed.

These PF and provident funds trusts are worried that if payment is limited to secured creditors, then only financial creditors like banks will receive the dues while unsecured bond-holders will get any payments.

IL&FS bonds attracted investments by PF trusts as it had the shareholding of SBI and LIC giving its bonds the comfort factor.

( This story is auto-generated from a syndicated feed.)

Why home insurance should be your top priority

Here are a few reasons as to why home insurance is a must-have thing and how it can help one to avoid a huge financial setback in the event of any mishap.

A home is not merely a structure made of cement and bricks, it is a space filled with emotions. People earn for their lifetime and give everything to build a place where they could live comfortably with their family. You gave your all to have a home of your own, but do you have any backup plan to protect the same? There are few things which we as a human do not have control over, and to protect the ‘humble abode’ that you have instituted with the years of constant dedication and hard work, home insurance should be your top priority. However, the irony is, people, see it as an unwanted expense, but in fact, it is not. Let us check out some legitimate reasons as to why a house or home insurance is a must-have thing and how it can help you avoid a huge financial setback in the event of any mishap.

1. Natural Disasters

As mentioned earlier, there are few things which are beyond our control, and natural disasters like “Acts of God” are one of them. It can strike anytime, and anywhere. Remember the recent floods of Kerala, Uttarakhand and Mumbai that affected millions of lives with deaths, injuries, and destroyed homes. People witnessed houses and assets getting destroyed in front of their eyes and had to use their hard-earned savings to rebuild homes. It was a traumatic and emotional experience for them. Therefore, to protect yourself and your family against “Acts of God” such as landslides, floods, earthquakes, cyclones, etc., it is important for you to buy a home insurance plan.

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2. Man-made Disasters

No doubt we live in a technology dominating society where we have the latest and fanciest of safety measures, such as CCTV security and gated communities, but we cannot rely on them completely for our security, can we? Man-made disasters such as riots, strikes, robberies, terrorism, thefts, etc., are a real risk and still prevalent. And this makes for a strong reason for you to have a proper home insurance plan. However, some insurers may not cover for the losses due to all these risks, but you can ask them for extra protection in the form of riders.

3. Protection for the Contents Within

Home insurance not just covers your house, but also the contents within. Things like electronics, furniture, jewellery, light fixtures, antique items, valuable home appliances, etc., are also covered under a home insurance policy. However, the scope of coverage might vary as per your preferences. In case of any damage or theft, you will get compensation for the same or even get them replaced with the new ones. So when choosing a home insurance plan, you can actually opt for the things that you want to get cover for along with your home insurance.

4. Not Expensive

For many, home insurance may seem like an unnecessary expense but a few know that it comes at a fairly low premium rate, which may be cost lesser than a rupee per day. And in return, home insurance buyers get significant benefits. Further, you get the flexibility to increase or decrease the premium amount as per your affordability by simply adding or removing the items to be insured under the policy.

5. Protection against Lawsuits

What if you incidentally damage someone else’s property owing to the spread of fire? You will be in a legal hassle. But, home insurance can save you from such hassles by covering the cost for the damage caused to another property due to any incident. Not only this, it also covers the cost for the medical expenses of the visitor or guest injured in your property during that event.

6. Coverage for Rent

If in case you experience a loss due to fire perils, and it makes your home inhabitable, be it owing to a natural disaster or manmade circumstance, you may have to find a temporary accommodation until your home gets reconstructed. In that case, your insurer pays for your rent. So, being a responsible individual, it is always wise to be prepared for the worst, and home insurance ensures financial support in such situations.

7. Peace of Mind

You cannot deny the fact that for most people, home insurance actually sounds like a certain expense for an uncertain reason. However, the peace of mind offered by home insurance is more than anything that money can actually buy for you. So, it does not matter whether you own a villa or an apartment, once you buy home insurance for it, you get the luxury of peace of mind because you know that you are prepared for the worse. Buying home insurance is indeed a proactive step you take to protect your home from unforeseen dangers. It signifies what extent you can go to protect your home. Moreover, home insurance is the right policy to provide protection from uncertainties not only to homeowners but to tenants as well. However, when you buy home insurance make sure you opt for the policy offering the best cover.

Follow the 5 simple rules to select debt schemes

The recent credit downgrades have unnerved mutual fund investors.

Follow the 5 simple rules to select debt schemes

  1. Invest in a fund matching your credit & interest rate risk appetite. Always factor in the possibility of default.

Rethink if, – AAA bonds < 50%

Duration > 2

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2. Check how diversified is the debt portfolio. A 10,000 cr AUM is invested in just 20-30 bonds, or is spread across 50-80 bonds? This ensures basic safety through diversification. If there are fewer bonds, ensure they are all highest rated, else concentration increases risk.

3. Check the concentration risk of the portfolio especially in lower-rated bonds. High exposure in a single paper means, higher loss in case of default. A high % exposure, say 5-9%, in a very low rated paper, shows recklessness. Much more in multiple papers is indicates higher risk.

4. Check the levels of diversification across all the schemes of the mutual fund. That gives an idea of existence or otherwise of risk management across the fund house. That is a sign of a far greater sense of responsibility towards investors money, a sign of not being reckless.

5. While a fund, it’s fund manager & fund house selection is important, diversification across fund houses is VERY important. Even if a fund house conforms to your expectations today, there are no guarantees that it will continue to conform in the future.

 

Note: Mutual fund investments are subject to market risks read all scheme related documents carefully.

DISCLAIMER:

No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here.

Do your mutual funds have exposure to Essel Group?

Many investors are concerned about the impact the Essel Group fiasco will have on their mutual fund investments.

The Essel Group claims to have reached an understanding with lenders who hold pledged shares of the group’s promoters. This could arrest the decline in the Essel Group stocks. Group companies shares had plummeted 10-33% on Friday, triggered by reports of payment defaults and sale of pledged shares.

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While the sharp fall in stock prices dented the NAVs of equity funds holding these scrips, there were fears that the crisis would spread to debt funds as well. More than Rs 8,000 crore worth of bonds and debentures issued by group companies is held by 150 debt mutual funds. Of this, Rs 6,329 is invested in 60 open-ended debt funds while the balance Rs 1,672 crore is in 90 fixed maturity plans (FMPs).

In a statement issued after the meeting with lenders, the Essel Group stated that it has been agreed that the no default will be declared due to the steep fall in price and there will be synergy and co-operation amongst lenders.
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The Aditya Birla Sun Life Mutual Fund is the biggest investor, with an exposure of Rs 2,936 crore spread across 28 schemes. This is almost 37% of the total debt fund exposure to the Zee group. 

However, Aditya Birla Mutual fund is confident that the prices of these bonds and debentures will not be impacted. “These bonds are secure.” 

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One scheme alone has Rs 1,288 crore invested in Zee group bonds. As on 31 December 2018, the Aditya Birla Sun Life Medium Term Plan held zero-coupon bonds worth Rs 720 crore issued by Sprit Infrapower & Multiventures Pvt Ltd. (credit rating A) and Rs 568 issued by Adilink Infra & Multitrading Private Ltd (unrated). The two holdings account for 12.5% of the fund’s total Rs 10,272 crore portfolio and are its top holdings.

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Another scheme, the Aditya Birla Sun Life Credit Risk Fund, held Rs 740 crore worth of zero-coupon bonds of Sprit Infrapower & Multiventures Pvt Ltd. and Adilink Infra & Multitrading Private Ltd. The two holdings account for 9.2% of its portfolio, with Spirit Infrapower as its top holding (5.62%). The Aditya Birla Sun Life Dynamic Bond Fund has over 8% of its Rs 5,136 crore portfolio invested in Sprit Infrapower bonds.
In percentage terms, Baroda Mutual Fund schemes have the largest exposure to bonds issued by Zee group companies. As on 31 December 2018, the Baroda Credit Risk Fund had Rs 168 crore invested in zero-coupon bonds of ARM Infra & Utilities Pvt Ltd. and Cyquator Media Services Pvt. Ltd. Together, this is 17.7% of its Rs 947 crore portfolio.

The silver lining for debt fund investors is the new rule that allows side pocketing of distressed assets. It is an accounting method that separates illiquid bonds from quality investments in a debt portfolio. If the Zee group bonds crash, open-ended debt funds may cushion themselves by putting them aside in a separate side portfolio. The fund’s NAV then reflects the value of the liquid assets, with a separate NAV assigned to the side pocket assets based on their estimated value.

However, this will not apply to fixed maturity plans (FMPs) where the scheme has a limited tenure and bonds are held till maturity. HDFC Mutual Fund, the second largest investor in Zee group debt with an exposure of Rs 1,196 crore, has most of its exposure through FMPs. It has invested over Rs 900 crore in bonds and debentures through 38 FMPs. Some FMPS have over 20% of their assets invested in Zee group companies.

Note: Mutual fund investments are subject to market risks read all scheme related documents carefully.

DISCLAIMER:

No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here.

What happens to MF exposure to DHFL debt after downgrades by CARE

For mutual funds with exposure to DHFL debt, a rating downgrade means that there will be a mark to market impact on individual bond prices, also affecting NAV

After CARE cut ratings from “AAA” to “AA+” for debentures, loans and deposits. Rating for commercial paper (“A1+) has kept under watch with developing implications.

With DHFL group companies debt mess coming under the lens, global brokerage Credit Suisse has warned that it could trigger a second wave of risk aversion in India’s debt fund industry.

Earlier, India’s debt mart faced a major risk aversion during September-October following a debt default by the IL&FS group.

The DHFL debt mess is expected to have a resonating effect as the company is among the larger borrowers from mutual funds (MFs) and their aggregate exposure stood at around Rs 8,650 crore as of December 2018. That amounts to about 0.7 per cent of debt mutual funds asset under management as of December 2018.

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About Rs.7,800 crore of such debt has been purchased by open-ended MF schemes, while the rest of the money is with closed-ended funds. Open-ended funds are where investors have the highest liquidity since you can come in or go out anytime. Closed-ended funds don’t allow you to exit before maturity.

Several fund houses have large exposures to DHFL, at 2-15 per cent of total debt AUM, with some schemes having up to 30 per cent of their AUM to DHFL

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UTI Mutual Fund had the maximum exposure of around Rs 2,144 crore as of December 31, 2018, followed by Reliance AMC at Rs 1,488 crore, Axis AMC at Rs 771 crore and Franklin Templeton Rs 571 crore.

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The DHFL issue may result into more scrutiny of credit risk in debt funds, and considering the fact that NBFC funding relies on MFs for 10-30 per cent of their borrowings, debt funds flow will see some hiccups in the coming days.

Some schemes have taken mark-to-market (MTM) losses on this exposure with DHFL paper being repriced at higher yields. Credit Suisse warned if this continues and leads to redemption pressure, it may cause a second wave of risk aversion in domestic debt funds and volatility in their flows.

In the open-ended space, about Rs 300 crore of exposure is to Aadhaar Housing Finance, which will now become the responsibility of Blackstone. DHFL is a Rs 6,200 crore of debt exposure for funds.

Debt raised by firms like DHFL is repaid within a few months (or years) as per maturity. If DHFL at some point is not able to honour its obligations, then that will be default like situation eg. IL&FS. However, such a situation may not really happen.

As a precautionary measure, some mutual funds may, however, write down the value of the bonds.

There is also the option to segregate or side-pocket bad assets so that the impact of the downgrade does not lead to panic redemptions. However, side pocketing can happen only in extreme cases, and that too when there is a default-like scenario.

Existing investors – For mutual funds with exposure to DHFL debt, a rating downgrade means that there will be a mark to market (MTM) impact on individual bond prices. This means there will be an impact on the Net Asset Value (NAV) of the funds.

In some cases, the MTM impact of the first series of downgrades on bond prices can be as significant as 25%. This means a 5% position for the bond in a fund would result in a negative 1.25% MTM performance attribution due to bond holding.

Any redemption from such funds at this point would result in an actual booking of losses.

Keep an eye on schemes with 10-33% exposure to single DHFL security.

Such examples are DHFL Pramerica Ultra Short Term (Dewan Housing Finance Corpn. Ltd. TR-1(30-Apr-19), JM Income (Dewan Housing Finance Corporation Ltd. SR-I CATG III & IV 09.10% (09-Sep-19)), JM Short Term Fund (Dewan Housing Finance Corporation Ltd. SR-I CATG III & IV 09.10% (09-Sep-19)), JM Low Duration (Dewan Housing Finance Corporation Ltd. SR-I CATG III & IV 09.10% (09-Sep-19)), Baroda Dynamic Bond (Dewan Housing Finance Corporation Ltd. SR-III CATG III & IV 09.25% (09-Sep-23)), DHFL Pramerica Medium Term (Dewan Housing Finance Corporation Ltd. SR-II CATG III & IV 9.15% (09-Sep-21)), DHFL Pramerica Floating Rate (Dewan Housing Finance Corporation Ltd. SR-I CATG I & II 09.05% (23-Sep-19)), DHFL Pramerica Low Duration (Dewan Housing Finance Corporation Ltd. SR-I CATG I & II 09.05% (23-Sep-19)), BNP Paribas Medium Term (Dewan Housing Finance Corporation Ltd. SR-I CAT I-IV 08.90% (04-Jun-21)), BOI AXA Short Term Income (Dewan Housing Finance Corporation Ltd. CATG I & II SR-IV 9.1% (16-Aug-19)), Tata Medium Term (Dewan Housing Finance Corporation Ltd. SR-I CAT I-IV 08.90% (04-Jun-21)).

 

Note: Mutual fund investments are subject to market risks read all scheme related documents carefully.

DISCLAIMER:

No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here.