By Rajani Tandale
Debt mutual funds are schemes that invest in debt instruments that carry a fixed rate of interest. There are 16 different types of debt mutual funds that SEBI has categorized largely based on types of securities and investment horizons.
Some of the risks we often analyze in debt mutual funds are interest rate risk, credit risk, liquidity risk etc but the portfolio concentration risk is not evaluated in detail.
Is it true that debt mutual funds, as they are often promoted, are risk-free and well-diversified safe financial instruments? In reality, the insidious concentration of assets in debt mutual funds is held by a number of private group companies.
The current asset under management (AUM) of all debt mutual funds is around Rs 13 lakh crore. The debt allocation to the top 20 entities and private group companies consists of almost Rs 10 lakh crore, which is 80% of the allocation of total debt AUM including Gsec, T-bills, cash and equivalent.
Instruments that are covered under debt mutual funds are corporate debt, commercial paper, G-sec, cash and equivalents, certificate of deposit, floating rate instruments, PTC and securitized debt, REITs and InvITs, domestic mutual Fun units etc.
The industry has allocated 5% of AUM, which is close to Rs 67,000 crore to HDFC group (HDFC Ltd, HDFC Bank, HDFC Securities, HDFC Credila Financial, and HDFC Life) through various bonds and securities. 4% of AUM is allocated to Reliance Group (Reliance Industries, Reliance Jio, and Reliance Retail Venture) which is close to Rs 48,000 crore.
Around Rs 40,000 crore is invested in close to 20 TATA group companies like TATA steel, TATA Power Company Ltd, TATA Teleservices, TATA Capital Housing Finance, TATA Capital Financial Services, etc. The list goes on, with other notable inclusions including – around Rs 26,000 crore worth of assets invested in the Axis Group (Axis Bank, Axis Financial Ltd, and Axis Securities) which is close to 2% of total debt AUM; around Rs 17,000 crore in the Kotak Group (Kotak Mahindra Bank, Kotak Securities, Kotak Mahindra Prime, and Kotak Mahindra Investments); and around Rs 15,000 crore each in the Bajaj and ICICI Group, among others.
In the past, a series of defaults and downgrades in debt mutual funds like IL&FS, Essel Group (Zee Group), Yes Bank, Reliance Anil Ambani, etc., have transpired. Stress in one company within the group can propagate to the rest of the other companies of the same group. This should serve as a warning to investors in debt mutual funds that a large allocation to group companies may enhance the fund’s overall risk.
The overall G-sec and SDLs allocation are gradually increasing in the industry from the past few months as they are at attractive rates and the increase in G-sec allocation also implies that we are at a peak of the rate hike series and expecting a standstill from here.
Asset-wise industry debt allocation
|Instruments||Market Value (Rs.in Cr.)||Allocation in %|
|Government Securities & T-bills||315779||24%|
|Cash & Cash Equivalents and Net Assets||185591||14%|
|Certificate of Deposit||180995||14%|
|Floating Rate Instruments||10217||1%|
|PTC & Securitized Debt||2719||0.2%|
|REITs & InvITs||817||0.1%|
|Domestic Mutual Funds Units||532||0.0%|
If you look at holdings based on ratings, AAA, Sovereign, and cash equivalent make up the majority. Nearly 15% of its holdings are cash and equivalents, 25% are government securities and Treasury bills, and more than 56% are AAA and equivalent-rated bonds.
The allocation to AA and A-rated bonds are less than 5%. Following the Franklin Templeton fiasco, the industry has changed from focusing on returns to maintaining a healthy portfolio. They have gradually reduced credit papers. Amongst the higher-risk bets, bonds rated B, Unrated, C and D are close to Rs 500 crore which could be a concern.
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Rating-wise asset allocation
|Rating||Market Value (Rs.in Cr.)||in %|
|Cash & Equivalent||185591||14.3%|
|REITs & InvITs||817||0.1%|
|Mutual Fund Units||532||0.0%|
Debt mutual fund selection should be based on the investment horizon, investing strategy, and financial goals. We suggest that one should always seek professional advice while investing.
(The author is Product Head, Mutual Fund at 1 Finance. Views expressed above are those of the author)