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The huge exposure of the mutual fund (MF) industry to non-banking financial companies (NBFCs) and housing finance companies amid rising interest rates and a liquidity crunch has caused much concern among investors.
To add to the woes, the uncertainty brought in by the IL&FS crisis in the bond market has almost wiped off the entire gain made by investors over the past year from debt schemes.
Under SEBI norms, MFs can have an exposure of up to 25 per cent in bonds issued by NBFCs and 15 per cent in those issued by housing finance companies (HFCs). Typically, these bonds offer a higher carry of 40-50 basis points (0.40-0.50 per cent).
The MF industry’s exposure to commercial papers (CPs) issued by NBFCs increased 53 per cent in August to ₹1,44,220 crore, against ₹94,180 crore in the same period last year. Their exposure to corporate debt papers of NBFCs — such as non-convertible debentures and floating rate bonds — was down 10 per cent to ₹1,04,378 crore from ₹1,15,435 crore.
Downgrade impact
The asset under management (AUM) of MF debt schemes was up 13 per cent to ₹14,75,055 crore (₹13,08,896 crore) in the last one year. Any downgrade in the rating of NBFCs and HFCs amid liquidity concerns may further impact the MFs and lead to an erosion of investors’ wealth.
Taking cognisance of MF exposure, SEBI had sought details from fund houses on their exposure to NBFCs and HFCs.
Saravana Kumar, Chief Investment Officer, LIC Mutual Fund, told BusinessLine that the net interest margin of NBFCs and HFCs is expected to come down by 25-50 basis points with their borrowing cost going up on the back of rising interest. Though there are no concern on bond redemption by top rated NBFCs and HFCs, some of the highly leveraged smaller companies may face challenges, he said.
Good ratings
The MF industry had invested about ₹2,600 crore through 18 schemes in the debt papers issued by the troubled IL&FS and its group companies, which enjoyed high ratings on the back of the financial support offered by its parent company.
On September 8, rating agency ICRA revised the short-term rating for the CPs of IL&FS and IL&FS Financial Services to ICRA A4 from ICRA A1 plus. It further downgraded the CPs of IL&FS Financial Services to D from A4 on September 17.
The corporate bonds and long-term loans of IL&FS were downgraded by nine notches to BB from AA plus, sending shivers down the spine for investors.
On September 10, MF investors were in for a huge shock when the net asset value (NAV) of a few liquid funds and ultra-short term funds fell by over 1 per cent. Over the next few weeks, the NAVs of these funds fell further, dropping by nearly 5 per cent in a day.
SEBI norms dictate that MFs have to mark down their investments if there is a dip in their value. With the credit rating on the instruments in which MFs had an exposure falling below investment grade, some of the fund houses had to mark down their investments by about 30 per cent to reflect the fair value.
Fortunately, some of the mutual funds that invested in IL&FS Securities Services, which was taken over by IndusInd Bank, received redemption and interest payment in three tranches last month.
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