Fund houses are getting proactive in reassuring distributors and investors after the rating agencies downgrade of Amtek Auto paper.
While CARE has suspended Amtek’s rating for the company due to non-disclosure, Brickworks Ratings has downgraded its rating from A+ to C. Such rating downgrades cause mark-to-market loss on existing bonds due to higher yield on new paper and vice versa.
The bonds of Amtek Auto are maturing on September 20. Market participants say that there is a possibility that the company may default on meeting its debt obligation.
Last week, JP Morgan MF has restricted redemptions in its two schemes – JP Morgan India Short Term Income Fund and JP Morgan India Treasury Fund having collective AUM of Rs. 2,964 crore. Both these schemes have 15.4% (Short Term Income Fund) and 5.3% (India Treasure Fund) exposure to Amtek Auto. As a result, the NAVs of both these schemes fell 3.38% and 1.73% respectively.
Since many fund houses are offering corporate bond funds and credit opportunity funds, they too can face similar risks, say financial advisors.
Cafemutual spoke to a few fund managers and experts to understand their perspective on this issue.
R Sivakumar, Head – Fixed Income & Products, Axis MF, said, “At this juncture, corporate bonds are not providing attractive yields. The yield spread between AA rated paper and G sec is 200 bps and ‘A’ rated paper and G sec is 100 bps due to weak corporate performance. Hence, we have avoided such paper. Investors can diversify their debt fund investments by investing in a high rated debt paper and a small portion in good quality corporate bond fund to improve portfolio returns.”
Dwijendra Srivastava, Head – Fixed Income, Sundaram Mutual Fund is of the view that investors should not panic at this moment. “I think investors should not the press panic button and wait till September 20. However, the mutual fund industry need to get more vigilant while picking up corporate bonds.”
In a letter sent to investors and distributors, Maneesh Dangi, Co-CIO, Birla Sun Life MF, has said, “We like entities that belong to sectors that have already defined regulations and strong regulators. We avoid loosely regulated (and hence open to the potential risk of entry of a regulator) sectors. We prefer companies that are part of large diverse groups. Hence we may invest in smaller companies of a large group where otherwise if it were a standalone company we may have avoided the same in case we believe that the group would support the company due to moral / economic / strategic reasons.”
Vidya Bala, Head – Mutual Fund Research, FundsIndia, pointed out that most of the short term funds having maturity of less than three years have increased their exposure to low rated paper. “Currently, CPs, CDs and AAA rated paper are not providing attractive opportunities to fund managers. Hence, many fund managers have invested in low rated paper. However, short term fund should not take undue risk by investing in low rated paper. Long term funds can take such accrual strategies. Investors should thoroughly access portfolio before investing in such funds.”
A media report published in ‘The Economic Times’ said that SEBI has warned fund houses against randomly investing in corporate bonds and securities which could backfire and leave investors in the lurch. The report further said that the market regulator is worried that mutual funds may be carrying excessive credit risks in their fixed income schemes.
