UTI fund dabbles in low-rated debt papers

Mukta Malhotra

Mumbai, May 15: EVEN AS eyebrows are being raised for its investments in questionable equities, Unit Trust of India (UTI) has also been dabbling with low-rated debt corporate papers which could affect the interests of its investors in the debt schemes.

The investment pattern of UTI Bond Scheme, claimed to be one of the best performing debt scheme from UTI, is the case in point.

This is because UTI Bond Scheme’s investment policy even seems to go a bit off tangent from the domestic mutual fund industry’s unwritten debt investment policy.

The fund managers in the industry have made it a norm to invest only in debt papers having a minimum rating of AA/AA+.

Against this prudent investment industry-wide norm for debt papers, UTI Bond Scheme is known to have invested 15 per cent of its investment portfolio in AA- rated papers, 6 per cent in A+/A- rated papers and 1 per cent in BBB rated papers.

Debentures rated ‘A’are judged to offer adequate safety of timely payment of interest and principal. However, changes in circumstances can adversely affect such issues more than those in the higher-rated categories.

While the debentures rated ‘BBB’ are judged to offer moderate safety of timely payment of interest and principal for the present; however, changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for debentures in higher-rated categories.

Senior officials of UTI when contacted said that in some of the cases, ratings were higher when investments were done and got downgraded subsequently.

This may partially explain why the fund’s corpus has come down to Rs 1,360 crore as on April 30, 2001 from Rs 1,570 crore as on June 30, 2000. The scheme’s annualised returns for the year ended April 30, 2001 was down to 10.44 per cent against annualised returns of 11.27 per cent for the year ended June 30, 2001. And the
Bond Fund says its investment objective is to lay stress on safe and consistent returns.

Knowing the pitfalls of investing in low-rated paper, mutual funds like HDFC Mutual Fund, Kotak Mahindra Mutual Fund among others have made it a policy not to invest in papers having ratings below AA.
A closer look at the rating profile of a number of private and public sector mutual funds also tells a similar investment pattern/policy.

The investment portfolio of Kothari Pioneer’s Income Builder Account Scheme — that invests in quality bonds and debentures — shows that the scheme has 87.92 per cent of its total investments in AAA/P1+ rated papers, 11.31 per cent in AA and 0.77 per cent in A rated papers.

Birla Sun Life Mutual Fund’s Birla Income Plus scheme’s investment in A and below-rated papers is also a meagre one per cent of its investment portfolio. IDBI-Principal Asset Management Company’s Income Plan Scheme also has 31.65 per cent of its NAV invested in sovereign debt, 61.88 per cent in AAA/P1 + and equivalent, 1.27 per cent in AA + and 5.20 per cent in other assets under its dividend plan.

Even SBI Mutual Fund’s Magnum LiquiBond, an income bond, has 81.41 per cent of its investments in AAA and equivalent, 5.50 per cent in AA, 10.20 per cent in AA +, 0.86 per per cent in A+ and only 2.03 per cent in AA- rated papers.