IL&FS crisis makes hole in investors’ pockets: Who is to be blamed for putting debt funds at risk?

Debt funds are considered safer than equity mutual funds as they don’t get affected by daily fluctuations of the equity markets. Moreover, most of the debt fund investments are made in fixed income securities having a fixed maturity period, resulting in predictable returns. Debt instruments in which investments are made contain government securities, treasury bills, gilt edge bonds, rated company bonds, money market instruments, etc.

As investments are made in fixed income and trusted instruments like government bonds, treasury bills etc, people even put their emergency reserves in debt funds. So, it is understandable that investors would get panicked if their emergency and contingency money invested in a trusted debt fund gives a negative return.

After the IL&FS crisis came into the light, dragging other NBFC bonds down as well, many debt funds having large exposure to the NBFC sector have turned negative, triggering panic among the investors. Panic puts further redemption pressure on the funds forcing the Asset Management Companies (AMCs) sell the devalued bonds without giving time to recover and resulting in further devaluation.

Most recently, an ultra short-term fund of an AMC, owned by famous and trusted fund manages, buckled under pressure and went down by around 8 per cent, which is unbelievable for a highly trusted ultra short-term segment.

Earlier, another AMC also faced a similar situation after it completely wrote off the IL&FS exposure, resulting in negative returns in its debt funds. After the complete write down, loss of an investor, after holding on a fund like regular savings fund for 3 years, stands at around 5 per cent.

Not only savings or short-term term funds, exposures of even liquid funds of many fund houses to IL&FS bonds have dented the confidence of debt fund investors, making them extremely cautious. Unless the NBFC crisis is resolved soon, more debt funds would meet with casualties.

But the key question is, whom to blame for such a debacle in a trusted segment of financial instruments? Some are blaming fund managers of AMCs and even demanding that the losses of investors should be compensated from the profits earned by respective AMCs.

But the fund managers rely on rating agencies, as they pick the bonds having good credit ratings. It is really surprising that rating agencies like ICRA, a unit of Moody’s and Fitch-owned India Ratings & Research and CARE didn’t raise red flag despite the IL&FS group’s debt burden jumping 44 per cent as early as in 2015. Market regulator Securities and Exchange Board of India (SEBI) should seek clarification from the rating agencies for their failure to detect the risks and assigning investment-grade ratings to the IL&FS group.

Although fund managers may be held guilty for ignoring the need of diversification and giving the funds over exposure to the NBFC sector, but rating agencies are also guilty of not performing their work properly and falsely giving higher credit rating to risky bonds.

Market regulator SEBI should urgently look into the matter and clear the mess to avoid further casualty and restore investors’ confidence in the debt fund segment.