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.
esselgroup

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.

DHFL ALLOCATION

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.

 

The biggest worry for global financial markets is China

China is the 2nd largest economy in the whole world and carries substantial economic hit with its trading partners. However, the slight fall in China’s equity market on 23rd November 2017 has set a fret in financial markets of China.

China Blue-chip stock index, CSI 300 had experienced its worst downfall in 17 months on 23rd of November. CSI 300 index fell by 2.93% as the market became worried about rising bond yields and PBoC deleveraging campaign.

CHINA

The current year, China’s bond yields have risen by 93 bps and are trading at 3-year highs. The sharp rise in China bond yields specifies the government’s determination to control corporate debt, which involves them in a talk that Chinese economy could fall in the coming future.

                                                        China CSI 300 Index

CSIThe top stock on Hang Seng was WH Group Ltd which stood up 1.69% and the stock which suffered loss was AAC Technologies Holdings Inc which sustained a downfall of 4.24%.

The 3 biggest H-shares percentage decliners were China Pacific Insurance Group Corporation Ltd which had a downfall of 4.73%, New China Life Insurance Corporation Ltd which has 4.7% and China Merchants Bank Corporation Ltd down by 4.1% while the biggest stocks which perform well were China Minsheng Banking Corporation Ltd which stood up 2.41%, Great Wall Motor Corporation Ltd which gained 0.98% and China railway Construction Corporation Ltd who stood up 0.77% in the Chinese financial market.

                                                China 10 Years Bond Yields

BONDSThe CSI 300 index is moving smoothly by 3.3% and closed down at 3% which is its biggest loss since June 2016 i.e., within 17 months. The ChiNext Index stood down by 3.2% which is its highest downfall in 4 months. The other two stocks, i.e., Shanghai Composite Index and Shenzhen Composite Index fell more than 2% that day.

Three finance lessons for your child

According to the report, China’s five years corporate bond yields had risen by 33 bps in November 2017, which has hit a three year high of 5.3%. In China, there is more than 1 trillion dollar of local bonds which are going to get matured in the coming year 2018-2019, therefore, it is going to be expensive for these firms to roll over financing.

 

Know the Portions of Your Rs.100 Bank Deposit.

In all the noise about rising bad loans, a deposit deluge in the aftermath of demonetization and the collapse of credit growth, it’s time to take stock of where public funds are lying right now in the economy.

In a report from the Reserve Bank of India, the credit-deposit ratio as of the month of May was 72%, which means that out of Rs.100 deposited in the bank, Rs.72 used for lending and the rest Rs.28 was used to buy government bonds. In the same time of the previous year, banks have used Rs.76 out of Rs.100 deposit for lending and had left the rest Rs.24 in bonds. This is as per the stock of deposits on the 30th of the month.

1001Source : Centre for Monitoring Indian Economy

Taking a look at the additional credit-deposit ratio, which shows what portion of the new flow of deposits, is getting placed in the credit. And this reflects the slump in credit growth in 2016-17.

By the time of March-end the additional credit-deposit ratio was 42%, this shows that more than half of the deposits that came in were placed in government bonds. These are low-yielding and very safe assets. This could be easily understood by the fact that the deposit stream following the demonetization of Rs.500 and Rs.1000 currency bills left a little choice to the banks to buy nothing but the government bonds as the loan demand is very less. Moreover, during the demonetization period, this was even lesser in the month of November, it was 1% only which aroused to nearly 13% in the month of December.

Trouble in India’s Credit System of banks having foremost NPAs

Now, if we talk about the month of May where the credit-deposit ratio was 72%, the large amount of share is still placed with industry through the loans accompanied by credit to services as well as individuals.

Share/Portion of Rs.100 Deposited

Out of every Rs.72 lent, nearly Rs.17 only went to personal loans and services each, and approximately Rs.28 or 29 went to build or run the factories. A share of Rs.10 went to agriculture. The share of personal loans has aroused in one year to approximately 25% of total non-food credit from 21%. On the other side, the industry has dropped to 38% from 41% while farming maintained its portion of nearly 14%. Basically, only Rs.25 of every Rs.100 deposited in a bank comes back to the people in the form of loans like home loans, car loans and other credits.

It is known that the banks are burdened with a big heap of bad loans. Approximately Rs.14 of every Rs.72 lent is now classified as stressed portion, which means it neither originate any income for the banks or due to the late payments by the borrowers to lenders.

What are the Long-Term Debt Funds and How to use It?

The long-term bond fund is the simplest type of debt and is varied across various kinds of fixed income tools and is usually meant for long-term investments only. Perhaps, it has a common structure but making money out of it is a bit tricky.

What is it about?

A long-term bond fund is meant for investors who wish to make money over the long term, typically over a period of 3-5 years. Like we have always said, debt funds are to be chosen based on your investment tenure.

The average maturity of these funds is in excess of 3 years most of the times.

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A long-term bond fund invests in a mix of corporate bonds and government securities (g-secs).

There are two types of long-term funds. One type of funds stay invested in long-tenured bonds and G-secs. The other type of funds are dynamic funds.

In a falling-interest-rate scenario, their average maturities go up to around 7-10 years. When interest rates rise, they stock up lower-tenured instruments and keep the portfolio’s average maturity low.long term bonds

Long-term bond funds are meant to provide you more return than the bank fixed deposits. And if held for longer time period, say more than 3 years, the returns are also tax efficient. These funds can give 8 to 10% returns over a 5 year time period.

But it’s not always as easy as it seems. Due to holding for long time period, these funds can get volatile when there are ups and downs in the interest rates of the economy. Also, in an assisted rising interest rate rule, long-term bond funds give moderate results as they can’t sell long-holding bonds and change to shorter holding bonds.

Amtek auto MF Holdings

According to a research analysis of a chain of 5 year returns over the previous 10 years, debt funds have returned 2 to 12% returns. That’s a broad range, but a lot also depends on your fund manager.

Dynamic bond funds are more volatile. Here, your fund manager may extend or minimize the fund’s average maturity extremely depending on his perspective of the interest rates.

For example, as per Crisil, RDBF (Reliance Dynamic Bond Fund) raised its average maturity period from 12.86 years to 13.49 years in 2016 as to set a standard security, 10 year g-secs’ production went down to 6.24% from 7.78%. When the 10 year production rose to 6.96% in April 2017 from 6.51% in December 2016 then in the same time RDBF’s average maturity fell to 9.69% from 12.22%.

Moreover, long-term bond funds were one of the few authentic debt funds when there were very few debt funds available in the market. There were great chances for the long-term investors to originate long-term income with minimal instability. But changing with the time, there are short-term funds and corporate bond funds that have proliferated providing similar income originating chances but with much less instability. Although, If one wants to stay invested with long-term bond funds for about 5 years or more to get better results, then substitutes like balanced funds and large-cap funds could give better results to you.

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 prior to making any actual investment decisions, based on information published here.

Is your MF holding an Adani power Debenture ?

The Indian Rating agency Crisil specified and accused Adani Power Ltd. of not proving the details of operations of the company for the rating action while conforming again its stable stance towards the company and BB- rating (3 scores below the investment point). Crisil said the bank loan facilities of Rs.6559 Crores are specified as non-cooperative. Also, it said that it is based on the ultimate information which is available as the Adani Power Ltd. has not provided the required information essentially needed to perform the rating action.

adani power

Crisil said that ‘the lenders, investors and all other market entrants should practice due caution while making use of the rating evaluated with the suffix ‘issuer not cooperating’. These ratings lack a progressive element as it is showed at without any management interaction and is based on the ultimate available or limited or dated facts and figures of the company.’

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Why Tata Group stocks are not attracting Mutual Funds anymore?

The investors must not take it at a face value. Including short-term and long-term loans Adani Power Ltd. has a total debt of approximately Rs.54000 Crores.

Following the Supreme Court judgment, Adani Power had to overturn Rs.3650 Crores of CT (compensatory tariff) in FY17 booked on the Mundra power plant of the company, on pass through of hike in Indonesian coal prices.

Amtek auto MF Holdings

Adani Power which could not be in the position to do any comment recorded company’s profit of Rs.1,012.19 Crores in the comparison of a net loss of Rs.4960.53 Crores.

In the recent past weeks, it is like downgrades are becoming a basic part of debt mutual funds’ investments and this is making the investors with low-risk appetites to take care of their selection of investments. Recently, the rating companies have issued the downgraded ratings to IDBI Bank BSE 0.33% and Reliance Communications and the Oriental Bank of Commerce and the latest one that includes in this list is Adani Power Ltd.

Interest rate on small savings deposits, PPF cut by 0.1%; effective from tomorrow

The government has lowered interest rates on small saving schemes like PPF, Kisan Vikas Patra and Sukanya Samriddhi scheme by 0.1 percent for the April-June quarter, a move that would prompt banks to cut their deposit rates.

For April-June, these have been lowered by 0.1 percent across the board compared to January-March. However, interest on savings deposits has been retained at 4 percent annually.

interest-rate-drop

Since April last year, interest rates of all small saving schemes have been recalibrated on a quarterly basis. For the January-March quarter, these have been kept unchanged compared with the October-December quarter.

A finance ministry notification said investments in the public provident fund (PPF) scheme will fetch lower annual rate of 7.9 percent, the same as 5-year National Savings Certificate. The existing rate for these two schemes is 8 percent.

Kisan Vikas Patra (KVP) investments will yield 7.6 percent and mature in 112 months.

WHY TO SELL YOUR FUNDS ?

The one for girl child savings, Sukanya Samriddhi Account Scheme, will offer 8.4 percent annually, from 8.5 percent at present, while it will be the same at 8.4 percent for the 5-year Senior Citizens Savings Scheme. The interest rate on the senior citizens scheme is paid quarterly.

Term deposits of 1-5 years will fetch a lower 6.9-7.7 percent that will be paid quarterly while the 5-year recurring deposit has been pegged lower at 7.2 percent.

Taurus Debt Mutual Fund fell by 7-12 percent in a day

The downgrading of the troubled Ballarpur Industries Ltd (Bilt) by India Ratings and Research (Ind-Ra) yesterday has adversely affected the schemes of Taurus Mutual Fund. The debt funds and liquid scheme of Taurus Mutual Fund fell by 7-12 per cent within a day preceding the IRR ratings.

Debt funds are generally categorized as low-risk investments except for the interest rate risk and default risk. Interest rate variations can deeply impact returns, especially in the case of long-term bonds.

The default risk is when the issuer of the bonds held by them is unable to repay, the prices of bonds can change surprisingly.

An amount worth Rs 110 crore was invested in commercial paper issued by Bilt in four debt schemes of Taurus mutual funds. Bilt had the top holdings in two severely devalued schemes namely, Taurus Dynamic Income Fund and Taurus Ultra Short Term Bond Fund.

Taurus funds lost due to revised BILT Ratings

TaurasThough SEBI has placed a 10 percent cap on the exposure to a single issuer, there is a leeway of up to 12 percent with the approval of the trustee. It looks as if the Taurus Mutual Fund has done this to increase exposure (to Bilt beyond the maximum 10 percent).

Recently, there have been some instances of drastic declines in debt funds due to the downgrading of the bonds and issuers. For instance, in February 2016, debt funds holding bonds issued by the Jindal Steel & Power Ltd (JSPL) went down after CRISIL lowered the company’s credit rating. JSPL bonds worth Rs. 3,000 crore were held in Mutual funds.

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Similarly, In August 2015, debt schemes of JP Morgan were demoted when Amtek Auto defaulted on repayment.

Credit risk is a real risk of loss of capital whereas interest rate risk is a volatility risk.

Investors should not compromise on credit quality for getting higher yields by. They should be aware of certain FMP’s that are lowering down the quality curve for chasing higher yields, and further stay away from such schemes.

Shift to short-term debt funds ?

Investors in debt mutual fund schemes are ending up in few days because of the massive rush in bond yields which has resulted in sharp market-to-market loss. Long-term income funds, gilt funds and dynamic bond funds were slowed their value down between 0.25% and 2.5% on 8th February, 2017 after the benchmark bond yield jumped 31 basis points. Reserve Bank of India indicates that there would be very small cuts in interest rates in the coming days.

The bond yield has grown up 12 basis points on 9th February 2017, which will result in further losses for debt mutual fund investors. Within last 2 working days, yields have raised about 43 basis points to 6.86% on 9th February, which resulted in the downfall of bond prices.

safe and higher returns compared to bank FDs

Yields and prices are independent of each other i.e. when yields grow up, prices slow down and similarly when yields decreases, prices rises up. Long-term debt funds always try to ease themselves from hike in prices as they get gains from bond trading.

Short-term bond funds have less effect of all these. The RBI has changed their position from being accommodative to neutral. This suggests you that there is very less chance of cutting the rates in the coming month. The benchmark yield can reach to 7% in coming 2 months period.

The RBI may have to involve them in the bond market. To reduce supply and support prices to lower the yield, the Central Bank could buy back bonds from the markets. Many investors had started investing in debt mutual funds as bank fixed deposit rates fell and they deposited cash in banks post demonetization.

According to the data received from AMFI, investors have to put in Rs 1, 66,016 crore in income funds from 1st April.

Even after the rush of yields in two-days, there is no profit in their hands. With no further capital appreciation in sight, investors should either bet on 8% GoI Saving’s bonds or simple bank fixed deposits, which will give them safety of capital.

In the same way, investors with a time period of 1-2 years could choose short term debt funds, with a similar maturity profile.