Suresh P Iyengar The mutual funds have started making right to side-pocket stressed assets a part of all schemes with debt exposure, as the default on bonds issued by corporates increasing by the day.

Many mutual fund houses including ICICI Pru Mutual Fund, Nippon India MF, Aditya Birla Sun Life MF, DSP MF, Axis MF, UTI MF and Kotak MF have already issued notices to investors on separation of defaulted asset in case of corporate default in future.

Kotak MF has incorporated provision for segregation of troubled asset in eight schemes including Kotak Liquid Fund, Kotak Bond Short Term Fund, Kotak Money Market Fund, Kotak Savings Fund, Kotak Dynamic Bond Fund, Kotak Banking and PSU Fund, Kotak Low Duration Fund and Kotak Corporate Bond Fund.

In a notice issued to investors, unitholders of the eight schemes, Kotak Mahindra Mutual Fund said the board of directors of Kotak Mahindra Trustee Company, the trustees to KMMF, have approved provisions to include creation of segregated portfolio and have decided accordingly to modify provisions in Scheme Information Document and Key Information Memorandum of the eight schemes and would be effective from February 26, 2020.

Challenges for other plans

Nilesh Shah, Managing Director, Kotak Mahindra Mutual Fund, said while segregating stressed asset is a normal process in liquid and credit risk funds, some of the equity and hybrid schemes can also face challenges in case of corporate bond default.

SEBI has allowed fund houses to inform investors of the procedure in advance and almost all the fund house has done it to protect investors interest, he added.

Asked whether there is any redemption pressure after the announcement on segregating defaulted assets, Shah said fortunately it has not happened so far and investors in debt schemes are well informed of the risk involved.

After a series of defaults by Zee Group, Anil Dhirubhai Ambani Group and IL&FS last year, the latest to worry mutual fund industry is Vodafone Idea Cellular which was downgraded to ‘below investment grade’ early this month.

Franklin Templeton Mutual Fund has created segregated portfolios in six of its schemes which had exposure to Vodafone Idea bonds.

Other mutual funds that have seen drop in net asset value due to investment in Vodafone Idea include Aditya Birla Sun Life Mutual Fund, Nippon India Mutual Fund and UTI Mutual Fund .

The highest drop was in UTI Credit Risk Fund which saw a 10.42 per cent fall in NAV.

The NAV drops were 30-60 per cent of the schemes exposure to Vodafone Idea, implying that there could be further loss of value if the company actually defaults or is downgraded by ratings agencies.

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