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DSP Mutual Fund's Sale of DHFL Bonds: Here's What You Need to Know - Outside View by PersonalFN

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DSP Mutual Fund's Sale of DHFL Bonds: Here's What You Need to Know
Dec 5, 2018

Non-Banking Finance Companies (NBFCs) are fire-fighting right now.

In September, the going got tough for them due to a challenging macroeconomic environment (depreciating Indian rupee, tightening of liquidity conditions, heated crude oil prices, inflationary pressure, etc.). Still, the corporate debt markets did manage to save the day, thanks to the massive support that mutual funds and other institutional investors had offered them until then.

But, the IL&FS fiasco pulled the carpet out from under the NBFCs. Consequently, the debt market contagion spread like wildfire to the equity markets as well.

[Read: How IL&FS Rating Downgrade Will Impact Your Mutual Funds]

Do you recall that DHFL's market capitalisation had eroded by a massive Rs 8,200 crore when the stock nosedived 43% on September 21, 2018?

Can you imagine the retail investors' plight who had bought those DHFL shares? They lost 42% of their capital in a day.

But these are typical stock market mishaps.

Clearly, the DHFL episode is a classic case of what a combination of bad news and rumours based on bad news can do to your investments.

So what was the bad news: DSP Mutual Fund sold "AAA"-rated DHFL debt papers worth Rs 300 crore at a high yield of 11%, which was indicative of 'some trouble'. This incited the markets to go into panic-mode, dragging other NBFC and HFC stocks down along with it.

And there were rumours too: Some believed that DHFL could make defaults like IL&FS. However, the DHFL management promptly addressed the markets' concerns about their preparedness to honour its debt obligations. Simultaneously DSP Blackrock had issued a clarification that its actions were more to reduce the duration of the portfolio. And, the fund house justified selling the "AAA" rated bond at around 18% discount as a measure to mitigate 'interest rate risk and not the credit risk'.

In plain English, DSP Mutual Fund suggested that it preferred to offload bonds of DHFL expecting interest rates on the short-term papers to go up and at no point did it believe that DHFL would default.

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As reported by the Mint dated November 23, 2018, DSP Mutual Fund clearly stated that, "Post the downgrade of IL&FS group companies, the fund has witnessed redemption of only 4% of the fund's AUM of Rs. 6,882 crore. This signifies there is no material redemption pressure on the fund."

The fund house maintains the same stance even today.

Nonetheless, the Capital Market Regulator doesn't seem impressed with the clarifications of DHFL and DSP Mutual Fund. The regulator has initiated an enquiry into the DSP Mutual Fund's bond sale that caused DHFL stock to crash.

If there wasn't any redemption pressure, then was DHFL the first paper DSP Mutual Fund could think of for sale at a deep discount?

Or is there more to this rationale?

Going by their actions, it looks like it. And we can anticipate some startling facts to come to light now.

Probing irregularities is a must to protect the interest of gullible retail investors.

Recently, Moneylife broke a story of mutual funds lending to the DHFL's promoters just as they did lend to the promoter group of Yes Bank. Is it a coincidence that the day when the DHFL's shares plunged, Yes Bank's market capitalisation declined by Rs 21,100 crore.

This gives rise to some crucial questions:

Is there any similarity between the fall of Yes Bank and the DHFL stocks?

Was the "AAA" credit rating assigned to the DHFL bonds real or was it as 'dependable' as the "AAA" rating the IL&FS stock had until a week before its subsidiaries defaulted?

Are there any unreported transactions between mutual fund houses and promoters of the NBFCs such as DHFL?

Is DSP Mutual Fund privy to any information about DHFL or its promoters that is unknown to the market?

Wasn't there any other paper which had a longer maturity and lower credit rating compared to DHFL, considering that DHFL decided to sell the company's bonds at a massive discount in the secondary markets at the time?

If, as DSP Mutual Fund maintained, selling the DHFL paper was a call on interest rates rather than the credit quality, then has the fund house sold any other "AAA" rated paper at a comparable discount?

Is DHFL expecting any significant loss on account of its Loan Against Property (LAP) portfolio which is not widely known in the public domain, but is known to the savvy debt market investors such as mutual funds?

Is there a drawback in the credit assessment processes of the mutual fund industry?

Are mutual funds ill-equipped in managing risk?

In an interview to the Mint, two people in the know have divulged that "The market regulator wrote to the fund house earlier this month probing whether there was a violation of model code of conduct by the fund house, when it sold the highly rated paper at a loss."

And, "In the letter, the market regulator has sought details of the transaction, the rationale of the sale and whether there was any other information that prompted the sale."

If you thought investing in debt funds are relatively risk-free, your perception could change after reading these stories.

Selecting a right mutual fund for your portfolio is a skill. Look beyond the mutual fund schemes that have performed well in the recent past. Perhaps, a few of them might give you nasty surprises by selling "AAA" bonds at a huge discount soon after investing in them.

PS: PersonalFN's special report 5 Undiscovered Funds may help you invest in equity funds without taking any undue risk.

These undiscovered funds, recommended in the report, have passed through a stringent scheme selection criteria set by PersonalFN.

To know more about the Undiscovered Funds, click here.

Author: PersonalFN Content & Research Team

This article first appeared on PersonalFN here.

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


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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