How Debt Mutual Fund Investors Lost 12% in a Day - Outside View by PersonalFN

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How Debt Mutual Fund Investors Lost 12% in a Day
Mar 3, 2017

You invest in a liquid fund expecting liquidity and safety. Liquid funds are an apt alternative to deposits in a bank savings account. It is a good avenue to earn decent returns on your short-term deposits. Pretty much the same way income funds act as an alternative to bank fixed deposits. Income funds can earn you higher returns than the traditional avenues.

But imagine waking up to a decline of 7% in a day on your liquid fund investment.

Yes you read it right...

In yet another example of the risk in debt schemes, investors in Taurus Mutual Fund's debt funds were in for a rude shock on February 23, 2017. Investors in these schemes lost as much as 12% of their investment value in the day prior.

Taurus liquid fund reported a 7.2% drop in its NAV on February 22, 2017. A decline of 7% in a day is not even common in equity schemes.

Indeed it is tough to digest; because you expect liquid schemes to deliver returns in the range of 6%-7% (annualised) at the least, with minute volatility. On extremely rare occasions the NAV of a liquid scheme declines.

To add to the injury, this was not the only scheme affected of Taurus Mutual Fund. All four debt oriented schemes of Taurus Mutual Fund reported a decline (over 11%) in NAV. Taurus Dynamic Income Fund (-11.8%), Taurus Ultra Short Term Bond Fund (-11.8%) and Taurus Short Term Income (-11.1%) were the other debt mutual fund schemes that suffered a loss.

Scheme Name Percentage Allocation to Securities of BILT Decline in NAV on February 22, 2017
Taurus Short Term Income Fund 11.95%  -11.13%
Taurus Ultra Short-Term Bond Fund 11.94%  -11.79%
Taurus Dynamic Income Fund 11.84%  -11.82%
Taurus Liquid Fund 4.33%  -7.22%

(Source: ACE MF, PersonalFN Research)

What was the reason? - The ratings downgrade of Ballarpur Industries

On February 22, 2017 India Ratings and Research downgraded Ballarpur Industries Limited's (BILT) Long-Term Issuer Rating to 'IND D' from 'IND BBB-'. Non-convertible debentures (NCDs) and commercial paper of the company were downgraded to 'IND C' on the day from 'IND BBB-' and 'IND A3', as on December 2016. 'IND D' is the lowest credit rating signifying instruments are in default or are expected to be in default soon. Whereas, 'IND C'-rated securities have a very high risk of default regarding timely servicing of financial obligations.

In September 2015, the securities were rated A+ and A1+ respectively.

So, what changed drastically?

India Ratings explains that the downgrade reflects delays in debt servicing by the company. BILT continues to face delays in the necessary deleveraging, as efforts to monetise its assets have not fructified within planned timelines. The company has also been unable to refinance its debt or elongate the maturity profile of its near-term debt obligations fully.

What's more shocking is that the credit rating company downgraded BILT by nearly four notches. This comes after Securities & Exchange Board of India (SEBI) stepped up vigilance on debt mutual funds amid ratings downgrades of corporate debt papers held by them. In November 2016, the regulator even shot out a circular to all Credit Rating Agencies (CRAs) ensuring that greater transparency is instilled in the policies of CRAs to enhance the standards.

In August 2015, JPMorgan India Short Term Income Fund and JPMorgan India Treasury Fund bore the brunt of their corporate debt holding in Amtek Auto Ltd. Brickwork Ratings had downgraded its rating to 'C', from 'A+' earlier, while CARE suspended the coverage of Amtek Auto.

And then again, a year ago in February 2016, Jindal Steel and Power Ltd (JSPL) underwent a ratings downgrade. Crisil downgraded JSPL's long-term rating from BBB+ to BB+. A month later, the rating deteriorated to default status. Schemes of Franklin Templeton Mutual Fund and ICICI Prudential Mutual Fund suffered. According to news reports, Franklin Templeton Mutual Fund dumped JSPL bonds at a loss of 25%.

PersonalFN believes, when you invest in debt funds, you should care more about the safety measures undertaken by the fund. Unfortunately, most investors overlook the risk.

Please keep in mind, debt funds are not risk free. You should ideally keep away from the funds that invest in debt securities of inferior quality. You should not invest in a debt scheme solely based on past returns, as certain schemes may have achieved higher returns by taking additional risk.

PersonalFN's DebtSelect research reports can help you select debt mutual fund schemes prudently and can be valuable guide. You can be rest assured about the unbiased nature of this service. If you're looking at handholding to select debt mutual funds, you may even reach out to a Certified Financial Guardian, a symbol of Trust & Integrity in the investment advisory space.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

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