Corpus Of Credit Risk Funds Shrinks By A Quarter Since IL&FS Collapse

Things have changed in the last one year. Assets under management of these funds have dropped, leading to a shrinking pool of capital that can go towards lower-rated bonds.

Just ahead of the collapse of Infrastructure Leasing and Financial Services in September 2018, credit-risk funds had over Rs 87,000 crore in assets under management. A year later these funds have lost over Rs 21,000 crore in assets under management, according to data from Value Research.

The rise of credit-risk funds began in 2016. In April 2016, these funds had around Rs 34,000 crore in AUM, which slowly rose over time to a peak of Rs 87,086 crore by the end of August 2018. Typically, these funds invest around 60-65 percent of their investment pool in corporate debt with a credit rating of ‘AA’ or below.

However, the risk-aversion generated by the collapse of IL&FS and subsequent defaults has pulled down the corpus of these funds by nearly 25 percent, shows the Value Research data.

The share of credit-risk funds in assets under management of all debt funds has also fallen from 9.34 percent in September 2018 to 6.47 percent now, the data shows.

Separate data from the Association of Mutual Funds in India, available from April 2019, shows that these funds have seen outflows in each month of the ongoing financial year. AMFI data for this specific category is not available prior to April.

Over the last few years, the surge in liquidity and drop in interest rates, along with tax incentives, attracted investors, said Dhirendra Kumar, founder and chief executive officer of Value Research.

“Credit-risk funds are meant to optimise returns. Unfortunately, mutual funds never demonstrated that with debt funds you could lose money over time but in the last six to eight months investors have learnt that they can,” Kumar said.

Corporate Bond Funds Gain

While credit risk funds have seen outflows, corporate bond funds, which invest close to 80 percent of their resources in ‘AAA’ or ‘AA’-rated debt, continue to see inflows.

The shift has meant that the assets under management of these funds has risen to over Rs 72,000 crore in September 2019 compared to a little over Rs 61,000 crore in April 2019. These funds have seen inflows for all but one month in the financial year so far.

Dwijendra Srivastava, chief investment officer-debt at Sundaram Asset Management Co Ltd., said that while credit-risk funds have seen outflows, money has come in selectively in a few corporate bond funds. “These corporate bond funds have been targeting very safe companies such as LIC Housing Finance, HDFC and Reliance Industries and public sector undertakings and public enterprises to keep the risk at a minimum,” Srivastava said.

Srivastava added that in the current environment risk appetite for debt paper remains selective. “In terms of credit-risk funds, renewals have shrunk and people will continue to be cautious and they will not knowingly park their money in lower-rated securities.”

Amol Joshi, founder of PlanRupee Investment Services, explained that there are three factors playing out in the market, which are impacting credit-risk funds.

The first, is that existing investors who have stayed for a few years and if they have completed three years of investing are choosing to exit as some of them do not have a risk-appetite to continue with credit-risk funds. The second, is that there is a “double-edged sword effect”of old investors exiting and a lower amount of fresh flows coming in because of the experience of the recent past, said Joshi.

“The third factor is that the case for investing in debt MFs remains strong due to many factors including indexation tax benefit for investments beyond three years, these flows are moving towards corporate bonds as a part of the flight to safety effect which is providing comfort to investors.”

Joshi added that mature debt investors are still seeing an opportunity in these funds despite the higher spreads compared to early 2018. “The mature investor, therefore, can invest at a higher yield-to-maturity level. If they stay put for three-years and if they or the fund manager believes there will be a compression of spreads over that period, there is some opportunity for capital gains too,” he said.