Even as Franklin Templeton shutters 6 schemes, mutual fund CEOs say all debt funds are not at risk

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April 25, 2020 2:45 AM

There was a degree of anxiety around credit risk funds, Barve said, and the name of the fund seemed to suggest that almost the entire portfolio of credit risk funds were toxic or had poor quality of credit.

Even in credit risk funds, which account for 5% of total debt AUM, there are conservative and aggressive credit risk funds.Even in credit risk funds, which account for 5% of total debt AUM, there are conservative and aggressive credit risk funds.

Bosses of leading mutual funds, under the aegis of the industry body, came out in full force to assure investors that debt schemes were not at risk, even as Franklin Templeton shuttered six schemes. Three mutual fund CEOs — Nilesh Shah of Kotak Mahindra Asset Management, Milind Barve of HDFC AMC and A Balasubramanian of Aditya Birla Sun Life AMC — came out to calm frayed investor nerves. All three CEOs said that many measures had been taken by the RBI and the regulator would provide more liquidity support if needed so there was no cause for worry.

There was a degree of anxiety around credit risk funds, Barve said, and the name of the fund seemed to suggest that almost the entire portfolio of credit risk funds were toxic or had poor quality of credit.

“This is far from the truth. For most of us who are managing credit risk funds, almost 20-30% of the credit risk funds comprises of ‘AAA’ rated papers and cash. Apart from that investments, these credit risk funds also have another 30-50% in AA and AA+. So basically, if you look at so-called credit risk funds the actual profile and underlying investments in these funds is of high quality,” Barve said.

Shah of Kotak AMC said that the maturity of Kotak’s funds should not have any impact on normal operations due to an isolated event of winding down at one mutual fund. He said that a bulk of the assets of the industry were in non-credit risk funds, which account for more than 90% of the industry’s assets under management (AUM). The credit quality of that portfolio is superior as confirmed by an independent rating agency, said Shah.

Even in credit risk funds, which account for 5% of total debt AUM, there are conservative and aggressive credit risk funds. Not all the credit risks have similar credit profiles. In fact, a majority of the credit risk has better quality assets, higher cash balance and better liquidity profile.

Terming Franklin Templeton’s decision to wind down six funds as unprecedented, Balasubramanian said that what happened on Thursday was something that ‘generally does not happen’. He said the mutual fund industry manages close to about `15 lakh crore in fixed income. The schemes in discussion on credit were only about 2-3% of the overall MFs debt portfolio. In general, these investments have high credit rating as well as high liquidity.

“The way industry has been managing the risk both by individual fund houses and guided by Sebi as well as Amfi as a body, the management of portfolio construction has been solid. The industry size of close to Rs 15 lakh crore comes on the back of the fact that industry has been managing credit portfolio quite efficiently over the period time. One isolated incident should not be considered negative for the debt funds and that should not extrapolate that there is an issue with everyone,” he said

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