DHFL Pramerica Mutual Fund has announced the merger of DHFL Pramerica Floating Rate Fund and DHFL Pramerica Medium Term Fund with other two debt funds having a similar investment mandate. The fund house has also introduced side pockets in two of their fixed maturity plans (FMPs).
Officials at the fund house also say going forward they would announce side pocketing across all the debt funds. Side pocketing means the scheme will have two NAVs (net asset value), one for liquid assets and another for illiquid assets. So, if an investor wants to exit the scheme, he can redeem the units from the liquid AUM while the units of the illiquid AUM can be redeemed later when borrowers have repaid the fund.
A spokesperson for DHFL Pramerica Mutual Fund said due to heavy redemption, both the schemes have seen a ‘passive breach’. In the best interest of unitholders, it was decided to merge these schemes into schemes with bigger assets. “Due to redemption, assets have come down by more than 90% which led to passive breach. This has happened across the industry and not only at DHFL Pramerica. This is because categories like credit risk and medium-term funds have lost a lot of assets as people have been worried about the overall environment in fixed income in the last six-eight months.”
According to the data from Value Research, DHFL Pramerica Floating Rate Fund has assets of around `13 crore. For DHFL Pramerica Medium Term Fund, assets are around `35 crore. DHFL Pramerica Floating Rate Fund will be merged with DHFL Pramerica Ultra Short Term Fund and DHFL Pramerica Medium Term Fund will be merged with DHFL Pramerica Credit Risk Fund.
Regulations say mutual fund scheme shall not invest more than 10% of its net asset value (NAV) in debt instruments comprising money market instruments and non-money market instruments issued by a single issuer. But DHFL Pramerica Floating Rate Fund has one holding issued by DHFL accounting for 31.94% of assets as on April, 2019, which led to passive breach. DHFL Pramerica Medium Term Fund has debt papers of DHFL accounting for 37.42% of the assets, show Value Research data.
According to market participants, mutual funds have exposure of around Rs 5,100 crore to DHFL, a non-banking financial company. DHFL Pramerica has an exposure of Rs 240 crore to DHFL of which paper worth `155 crore will be maturing in August and September this year.
In the last few months, DHFL underwent several downgrades by credit rating agencies. DHFL Pramerica Mutual Fund also announced side pocketing in DHFL Pramerica Fixed Duration Fund-Series AH and DHFL Pramerica Fixed Duration Fund-Series AP. “It is just for the ease of operational convenience as these funds have few number of investors,” said the spokesperson at the fund house.
Last year, Sebi in its board meeting had allowed mutual funds to create segregated portfolios or ‘side-pocket’ facility based on credit events with respect to debt and money market instruments subject to various safeguards.