What caused the Debt turmoil?
Example:
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The day IL&FS
default happened, debt funds got a shock and have not completely recovered yet.
Every other day one new story of default / potential default / filing papers
with NCLT is keeping investors on tenterhooks. The investing community is
fearfully watching the evolving scenario in a helpless manner. The
million-dollar question is when will this story end and when will the debt
market start to blossom again. Let us first understand what has happened in the
last six months. Four or five major events has affected the debt markets.
Event 1 – IL&FS
IL&FS defaulted
debt obligations in Oct 2018. This default was covered widely by the media and I
am not going to rewrite the same. This was the starting point of the debt
problem. DSP Mutual selling DHFL papers at a discount was the trigger for the
markets to fall and caused a disturbance in debt funds. Some mutual funds got
affected because of holding these papers of IL&FS group. The list is enclosed
in the excel file. As a cyclical effect NBFC liquidity issues cropped up.
Read the link below to know more about the IL&FS SPV
downgrade which hits 6 debt mutual fund schemes:
Event 2 – Essel group
Zee TV ‘s Essel
group was in the media for various wrong reasons and its shares got beaten down
heavily in Jan 2019. Some understanding quickly arrived between the group and
debtors including mutual funds. We must wait and see how things unfold. Potential
danger is looming around.
Read the links below to know more the Essel group
toubles:
Event 3 – DHFL
Cobra post carried an
article about the mismanagement of funds in a large scale at DHFL. No current
talk about DHFL defaulting but again a lot of negativity in the market about
this group. Both its share prices and bond prices were beaten down heavily. Many
mutual fund schemes are holding this groups papers. In case of any default
these funds NAV will take a beating proportionately to their holdings in this
scheme.
Read the link below to know more about which Funds Stand
To Lose Most If DHFL Debt Fears Come True:
Event 4 – ADAG
Reliance
communications filed papers with NCLT last Friday. Subsequently all ADAG group
shares were beaten down. Media reports more legal tangles are expected in this
regard. This will affect the debt papers of this group.
Event 5 – Vedanta group downgraded
Credit rating of
this group recently reduced a notch. Credit rating is again a factor that
affects debt price and NAV of schemes holding this groups papers. If upgrade
happens it is good for debt investor and if a downgrade happens then it is
negative news for debt mutual fund investors.
In this scenario investing in debt
funds is not an easy task. Steps to be done by debt fund investors:
1)
Review the portfolio holding of
schemes that you are planning to invest in. Do not get carried away by seeing
only the top five or ten holdings. Analyze all their folio holding details and
ensure that the fund is not holding any debt papers of the doubtful companies.
Steer clear away from doubtful groups till clarity emerges.
2)
Avoid corporate credit funds for some
time.
3)
Existing investors have to review their
schemes holdings. Depending upon its exposure to the doubtful groups, they can take
a call to exit or continue. This has to be reviewed case by case.
4)
Invest in very short-term funds
with good credit rating and strong track record.
5)
Do not put all your eggs in one
basket, it is better to diversify within debt funds too.
|
Scheme A
|
Around 3% of its total scheme holdings is of a
troubled group’s debt papers
|
|
NAV before debt write off
|
14
|
|
NAV after debt write off
|
13.58 (14 - 14*0.03)
|
|
If purchased at NAV of 13.75
|
loss of 0.17 (1.2% in absolute terms)
|
|
If annual return of this fund is 6%
|
last 6 months accumulation would only be 3%
because of the trouble
|
Request to SEBI
In the current
scenario investors are finding it very difficult to get the true picture of
holdings and write off details. SEBI’s intervention is required so that the AMC
will communicate to its investor with more details about their holdings. Complete
holding and write off details if any need to be communicated to the investor by
an AMC. There is so much of confusion and no clarity about a scheme holding and
their impact on investor’s investments.
#Those who need complete portfolio holding can reach out to us through Q&A page - https://radhaconsultancy.blogspot.com/2017/12/q.html
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