The last six months have been volatile for debt markets. Since the surprise IL&FS default, three other corporate groups – DHFL, Reliance ADAG and Zee Group – came under the scanner. Your clients having exposure to funds investing in these companies are likely to panic.
We spoke to some experts to understand how you can calm your client’s jittery nerves and manage their portfolio in the current scenario.
Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak MF says that distributors need to remind their clients that not every downgrade is a default. Sharing the example of the commodity prices meltdown a few years ago, she said that while many metal companies were downgraded, none of them defaulted on their debt obligations. According to Lakshmi, advisors should handhold their clients so that they stay the course and not panic, as many of these are MTM (mark to market) losses, which may not materialise. Currently, there is no one-size-fits-all; advisors need to evaluate the appropriate course of action for each client based on the time horizon and financial needs, she said.
In line with Lakshmi, Kirtan Shah, COO, StreetsAhead also busted the myth that a debt default means all the capital is lost, at a recent Cafemutual event. While a mutual fund has to mark down the debt immediately after default, in reality, fund houses may be able to recover a significant portion of the capital in the next few years, he said. Giving examples of Amtek Auto, BILT and JSPL, he shared that despite the default, actually most of the capital was recovered in the following years. Taking his cue from this data, he recommended IFAs to advise their clients to hold their investments for 2 to 3 years unless they have immediate cash requirements.
R Sivakumar, Head-Fixed Income, Axis MF advised IFAs to remind clients that despite the write-offs, funds have still managed to deliver reasonable returns. This is because the exposure to stressed assets was limited in most cases. Moreover, a significant part of the pain has already been absorbed in the NAV. Furthermore, except IL&FS no one has defaulted so far, so there is a possibility to recover these MTM losses in time. However, exiting at this stage could hit the overall returns considering the tax treatment.
Mumbai IFA Gajendra Kothari of Etica Wealth advises his clients to hold on or reduce their exposure to funds having stressed assets based on their portfolio allocation. “If a client has small exposure to these funds then I advise him to continue. On the other hand, if he holds more than 10% in these funds, I advise him to trim his positions a bit. Overall, we have seen such credit events in the past. In those cases, clients who remained invested for 3 to 4 years despite such events have made good money,” he said.
Advisor Suresh Sadagopan, Ladder7 Financial Advisories analyses his clients’ portfolios on case-to-case basis. Depending on the stressed asset exposure, he decides whether it makes sense to hold the investment.
Please share with us how you are handling your client’s portfolios in the current markets.
Action points
- Analyse your clients’ liquidity requirement. If the time horizon is over 3 years, recommend them to stay invested
- If an investor needs money or cannot digest volatility, it is better to reduce exposure
- Use this opportunity to educate clients about risks in debt investments
- Share past data related to credit events. In most cases, fund houses have recovered most of the money
- Remember, credit funds are only for investors with high risk appetite
- Spread your client debt investments across debt categories to mitigate risks
