Franklin Templeton one-off incident; credit risk funds still attractive, says mutual funds body

After Franklin Templeton Mutual Fund voluntarily closed six debt schemes in the wake of redemption pressure and tight liquidity in the high-yield bond market, the Association of Mutual Funds of India (AMFI) assuaged investors saying this is an isolated event and it will have no bearing on credit risk funds in particular or entire debt mutual funds in general. In fact, credit risk funds comprise less than 5 per cent of total assets under management (AUM) of debt MFs, it said.

"There is wrong perception in the market that credit risk funds only invest in high-yield low credit quality papers. Almost 20-30 per cent of the portfolio comprises AAA-rated papers and cash, while 30-50 per cent is invested in AA and AA+ assets. So, actual risk profile of underlying investments in these funds is relatively of high quality," said Milind Barve, Managing Director, HDFC Mutual Fund in an online press conference representing AMFI.

He, in fact, advised investors to take a tactical call and invest small amounts in credit risk funds. "What is happening in the credit market is yields on even extremely high quality papers is quite attractive now. So, it becomes an opportunity to make tactical investments in credit risk funds in small amount. Do not get carried away by what happened yesterday. There is no need to panic".

So far as redemption demand is concerned, AMFI assured that the fund houses have enough liquidity to meet redemption requests from investors. "There has been significant movement by fund houses in better quality assets, higher cash balance and better liquidity profile, which is why today maturity of MFs have zero borrowing. It shows in the fact that despite ongoing challenging situation, they have been able to meet day to day redemptions," said Nilesh Shah, Chairman, AMFI.  

Notably, Sebi regulations allow mutual funds schemes to borrow up to 20 per cent of their assets to meet liquidity needs for redemption/dividend pay-out. "While AMFI is in the process of collecting the data, many mutual funds have already informed us that they don't have any outstanding borrowing," Shah added.

Existing investors will do well to connect with a Sebi-registered investment advisor to take a closer look into their credit risk funds. If it holds high quality AAA, AA or AA+ rated papers, you may consider holding it, but if bulk of investments is in low quality papers, you should exit. "Historically, 15-20% of the papers which are below grade C have defaulted on their debt obligations," says Amit Jain, Co-Founder & CEO, Ashika Wealth Advisors.

In fact, in the overall corporate bond market nearly 40-45 per cent papers are rated below AAA, out of which 20 per cent is not even rated, says Jain. "With possible further extension of lockdown, these unrated papers might face difficulties in liquidity. Also, any papers below AAA grade may also be at risk selectively, depending on the industry and cash flow of individuals companies".

If you are a new investor looking to invest in the debt market, you must always focus on the quality of scheme's portfolio. "Retail investors should always only look for the quality of the portfolio and should completely ignore past performance, big names and big brands while making investments," says Omkeshwar Singh, Head- RankMF, Samco Securities.

Also read: Coronavirus impact: Franklin Templeton Mutual Fund shuts six schemes, Rs 30,800 crore investor wealth stuck

Also read: Coronavirus effect: Franklin Templeton to wind up 6 credit funds in India