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India Inc's financial stress spills over to debt MFs, makes them riskier

More redemption delays may follow as India Inc grapples with liquidity issues

India Inc's financial stress spills over to debt MFs, makes them riskier

Financial stress in debt-laden corporate India is now spilling over to debt mutual funds. Kotak Mahindra Asset Management delaying the redemption in six of its fixed maturity plans (FMPs) because of its exposure to the highly leveraged Essel group raises a question mark over not only the safety offered by debt MFs but also about the possibility of this scenario repeating in other schemes, which have exposure to highly leveraged companies.

"This is not the first time that something like this (postponing of debt MF redemption) has happened. But the frequency of these occurrences may be increasing now since corporate earnings have not kept pace with expectations. Besides, liquidity is an issue in the current market scenario," Jharna Agarwal, Head - Products, Preferred Business at Anand Rathi, told Business Today.

In August 2015, JP Morgan Mutual Fund restricted redemptions from two of its debt schemes due to exposure to Amtek Auto's debt papers. Kotak FMP Series 127 and 183 that matured earlier this month had an exposure of around 18 per cent to the Essel Group. Kotak has said it will not be able to pay the entire redemption amount to its investors on the three-year FMP as Essel's promoters have sought time until September 2019 to repay their dues.

UR Bhat, Fund Manager, Dalton Capital Advisors, says such incidents are unfair towards investors. "They had put money in debt mutual funds or money market MFs. However, if there is lending to promoters against shares, fund managers are taking an equity risk while positioning the fund as a debt fund. They are then not being true to the label of a debt MF by investing in debt structure with equity risk," he says.

Since in such cases, the underlying risk is not business but shares whose value can go up and down, fund managers expose investors indirectly to unknown equity risks, he adds. That itself is enough to make debt MFs a riskier investment option than actually perceived by investors.

Moreover, says Bhat, return expectations from equity are 20 or 25 per cent but in debt MF, investors get a return of 10 to 11 per cent only. "If they had invested in equity, they would have got higher returns. So, an equity kind of risk for debt kind of return hurts customer doubly," he explains.

"There could be specific pockets with overleveraged promoters, so fund managers should be careful about having enough security buffers. It requires prudence, like any other evaluation," Chandresh Nigam, MD and CEO, Axis Mutual Fund, told Business Today.

"Overall, except for pockets of strain, others are fine and higher yields justify that these securities are seen and evaluated from that perspective," he added.

Nilesh Shah, Managing Director of Kotak Mahindra Asset Management, however, allayed fears, saying that it was a miniscule part of the company's debt portfolio. "Of around Rs 1 lakh crore debt portfolio, only Rs 370 crore is exposed to Zee. The panic has been created as if the entire money is at stake, which is not true," he said.

Agarwal said in such a market scenario, it is important for investors to pick the right debt fund because there is an entire spectrum of debt funds that have taken very high risks. "Just like equity, investors need to be careful with debt MFs also," she added.

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