Debt Funds Downgrade By ICRA. Should Investors Worry?

Debt mutual funds 1 Debt Funds Downgrade By ICRA. Should Investors Worry?

Yet another default threat from IL&FS group prompted ICRA to downgrade the 6 mutual fund schemes from 3 different mutual fund houses. ICRA assigned a rating “watch with negative implications” for 2 schemes from HDFC Mutual Fund, 3 from UTI Mutual Fund and 1 scheme from Aditya Birla Sun Life Mutual Fund.

These funds have exposure to special purpose vehicles (SPVs) of IL&FS group. These mutual funds have invested in the debentures issued by Hazaribagh Ranchi Expressway Ltd (HREL), Jorabat Shillong Expressway Ltd (JSEL) and Jharkhand Road Projects Implementation Co. (JRPICL). The funds exposure to these SPVs are as follows:

HDFC Mutual Fund                                             Exposure
HDFC Short Term Debt Fund                              – 0.55%
HDFC Banking & PSU Debt Fund                       – 0.29%

UTI Mutual Fund  
UTI Banking & PSU Debt Fund                           – 6.87%
UTI Bond Fund                                                      – 5.98%
UTI Dynamic Bond Fund                                      – 6.25%

Aditya Birla Sun Life Mutual Fund
ABSL Short Term Opportunities Fund               – 1.15%

The question that arise in investors mind is “Why did these funds invest in debt laden IL&FS group which has already defaulted in its debt repayment? Experts say the SPVs structure is such that in case of default, the claims of the lenders are given preference over other claims. So, mutual fund houses relying on this provision has daringly invested in the IL&FS groups SPVs. Whatsoever, the justification, it seems unacceptable.

Nevertheless, let us have a look at the schemes that are exposed to IL&FS SPVs. All the 6 funds that has exposure to SPVs are currently ranked among top performing funds. And their exposure to the SPVs are below 50 crore except UTI Dynamic Bond Fund which has invested about 63 crore in the SPV. Moreover, the fund houses claim they have already underrated their NAV to that extent. But likelihood of the NAV to be further downgraded if the obligation is not met when it arises looms large. Although the exposure to these riskier assets are low and the track record of these fund houses are good, investors should be diligent before investing.

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