Workers transport tyres in New Delhi (Photograph : Prashanth Vishwanathan/Bloomberg News)

How The IL&FS Crisis Took A Toll On Mutual Funds

Fourteen mutual funds saw their debt assets erode by about a tenth in four months since fears of a credit shortage triggered redemptions from debt schemes.

Overall assets declined by Rs 61,000 crore since September for these funds, according to disclosures and data collated by BloombergQuint. Debt contributed nearly 70 percent of the drop for the funds that managed Rs 6.3 lakh crore worth of assets—about half the fixed income and debt investments of the industry as of January-end.

Defaults by IL&FS group led to a credit crunch, especially for non-bank lenders and triggered fears of a contagion. The credit crisis led to many investors withdrawing their money from debt schemes, especially liquid schemes, said Dhirendra Kumar, founder and chief executive officer at Value Research. “Investors also withdrew after losses in a few schemes which had debt exposure to some of the securities. There was flight to safety to some of the prominent mutual funds.”

DHFL Pramerica was the worst hit as its debt and equity assets dropped 57.3 percent during the period. Others whose assets declined include Indiabulls Mutual Fund, Edelweiss Mutual Fund, Invesco Mutual Fund and DSP Mutual Fund.

“Because of the IL&FS crisis and resultant credit crunch we saw a lot of institutional clients taking flight to safety and reinvesting in liquid schemes of top three to five mutual funds like HDFC MF and ICICI Pru MF,” Dhawal Dalal, chief investment office-debt at Edelweiss Mutual Fund, told BloombergQuint. “Small and medium funds were impacted.”

Edelweiss didn’t have much exposure to some of the names that emerged during the crisis, according to Dalal. Moreover the surplus liquidity with many corporates dried up and they have turned net borrowers, he said. “We haven’t seen much pace picking up in the first two weeks of February.”

DHFL Pramerica lost 61.8 percent of its debt assets since September, followed by Edelweiss, Indiabulls, Invesco and DSP Mutual Fund.

Liquid schemes, used by companies to park short-term cash, saw the biggest contraction in assets.

Only five of the 10 biggest mutual funds that managed investments worth 20.25 lakh crore—87 percent of the industry—as of January 2019 saw assets grow since September.