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
Though 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.
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.