Debt funds have confronted one bad news after another. The two of the worst affected categories in debt funds -- credit risk funds and medium duration funds -- have seen highest redemptions due to heightened apprehension of liquidity concerns and defaults. Now ABSL Mutual Fund has suspended two debt funds -- Aditya Birla Sun Life (ABSL) Credit Risk Fund and ABSL Medium Term Fund -- for new investors. These schemes will not accept any new lumpsum, SIP or STP investment requests. However, it will allow redemptions and existing SIPs and STPs to continue.
It has hardly been a month since Franklin Templeton closed six of its debt mutual funds due to unprecedented redemption pressure. In such a scenario, closure of two debt funds by ABSL fund house may give an impression that another scheme is biting the dust. The perception is not totally unfounded. These two funds saw substantial redemption during the last one month after the Franklin Templeton fiasco. The AUM of ABSL Credit Risk Fund, which was Rs 4,052 crore on April 23, 2020 fell down by 50.25 per cent to Rs 2016 crore on May 20. ABSL Medium Term Fund lived the similar fate as its AUM fell by 37.67 per cent from Rs 3,441.59 crore to Rs 2,144.87 during the same period.
However, the story appears a little different here. The fund house is claiming that existing investors may incur substantial benefit due to intended debt recoveries from existing bad assets. The suspension of funds for new investors as per them is intended to stop speculators from entering into the schemes and diluting the advantage of existing investors. "Investors are hardly affected due to these restrictions. On the contrary, it will benefit the existing investors in these schemes. New investors will have to wait to invest in these Schemes," says Nitin Shahi, Executive Director of FINDOC Group.
The fund house was significantly affected when the debt fund crisis unfolded in August 2018 with IL&FS default as it had exposure in debt securities of troubled firm. Many other debt securities held by the fund house also appeared on the shaky ground. The fund house had to sidepocket some of its troubled exposure on November 26, 2019, by creating a segregated portfolio of troubled assets to help the fund focus on recoveries. After the sidepocketing, existing investors were not given their due from this segregated portfolio. They were to be paid only when recovery was made in the portfolio. In case of ABSL, the schemes appear to make some recoveries from the bad assets and hence are expected to bring substantial gain for existing investors. The gain could be diluted to a great extent if new investors invest significantly.
The investors who were part of the suspended schemes at the time of sidepocketing will get their dues as and when recoveries are made in the segregated portfolio. "From the viewpoint of those who are currently invested in the debt schemes (that have discontinued inflow), it's a welcome move because this is a measure to check dilution of their gains. The existing investors will be paid off for the risk that they have taken. This is due to the expected recovery of funds written off by Aditya Birla Sun Life Mutual Fund over the last few months," says Pranjal Kamra, CEO, Finology.
However, as per Morningstar the fund house had marked down 35 per cent of its exposure in some of the troubled assets three weeks before the sidepocketing on November 26, 2019. So, investors who suffered losses before the sidepocketing happened may not get any benefit. "In our view the AMC should have opted for side-pocketing earlier in these schemes. This would have benefited those who have exited the schemes in losses," says Kamra of Finology.
At a time when debt investors are tired of getting bad news, this will give a fresh lease of hope. "The out of the way thinking by the Birla MF will boost confidence towards the existing investors. The measure will present the fund house as more responsible towards their investors and these measures can be used by other fund houses as well," says Shahi of FINDOC. This should lead the way for debt funds to take extra care of their investors' interest.