Mumbai, January 11: it is not only Equities that are volatile, thus far considered as safe for investment, the debt market have also turned volatile in the recent past. This has increased the anxiety level of those investors who turned to debt mutual funds (MFs) from the traditional safe saving products like to debt segment. However, the recent FMP fiasco and other developments in the corporate debt market helped the debt markets to turn volatile and impacting their returns.
However, there can be a sigh of relief, looking at the performance of some of the Credit Risk Funds (CRFs) from the leading fund houses.
Three CRFs have truly turned investors’ saviours during the last one year plus, when the Indian debt markets had been through the turbulence on account of multiple domestic and global headwinds. These funds have withered the storm by not only providing return of capital but also giving decent return on capital to their investors.
CRF category of funds invests predominantly in bonds which are below highest grade rating with an aim to generate alpha by taking additional risks, as they offer higher interest rates, and thus returns. Here too, the fund house maintained at least 20 per cent exposure to AAA rated papers.
ICICI Prudential CRF, among 12 CRFs, is leading the category by generating 9.35 per cent over the last one year and also saw net additions in the fund’s asset under management (AUM) that grew 3.09 per cent to Rs 11,707 crore. Other three CRFs that also gave comparable returns during the period of study are IDFC, Kotak and HDFC (see the table).
During the period of credit markets crunch due to defaults and credit rating downgrades last year, many such funds witnessed net outflows. Many other funds in the CRF category have either given less returns than the bank/postal Fixed Deposits or turned into losses. They have been in news for investing in poor quality instruments.
The funds’ whose performance has been below satisfactory have also witnessed large redemptions. Since the beginning of the credit stress last year, the CRF category saw outflows every month. As of November 2019, CRFs AUM have dropped 25 per cent to Rs 63,524 crore from Rs 85,066 in November 2018. Almost all mutual fund players witnessed a sharp fall in their respective CRF AUMs, ICICI Prudential CRF, IDFC and Kotak MF managed to stay positive.
Manish Banthia - Sr Fund Manager Fixed Income, ICICI Prudential MF said, "Accrual is the investment theme for the debt market in 2020. Our framework signals that accrual schemes including CRFs have remained in the 'buy' territory with attractive valuations (spread between repo rate) and negative sentiments (NBFC liquidity crunch). We believe accrual as space is currently providing good entry points for investors. Even from a risk-return perspective accrual remains attractive."
For its outstanding performance in the category, ICICI Prudential CRF, emphasises the importance of robust risk management and credit evaluation practices they follow including well diversified portfolio construction with a safety-first focus and a robust proprietary credit selection process.
Pankaj Mathpal, Founder and CEO, Optima Money Managers said, “ ICICI Pru’s CRF investment policy gives priority to safety, then liquidity and returns come last. With exposure to more than 80 securities, the fund’s portfolio concentration is about 1.15 per cent, one of the lowest in the industry. Low portfolio concentration ensures diversification of the portfolio, mitigating any adverse impact due to company/sector-specific risk”.
