BackJP Morgan India Short-Term Income Fund trips. Time to exit
Since the fund house hasn't given us any clarity on the situation, predicting developments in the next few weeks is difficult
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On Thursday, two of JP Morgan Asset Management (India) Co. Ltd’s fixed income schemes sank sharply. JP Morgan India Short Term Income Fund (JSTI) lost 3.38% in just one day, and JP Morgan India Treasury Fund (super institutional plan; JTF) fell by 1.73%.
JSTI is part of Mint50, Mint’s curated list of mutual funds (MFs). It was included in September 2014. While debt funds are prone to volatility, such sudden drops are unusual.
This fall has been due to a downgrade in the credit rating of one of JSTI’s investments, Amtek Auto Ltd. According to Value Research data, 15.37% of JSTI’s corpus was invested here as per its July 2015 portfolio. JTF, too, had 5.29% invested in the scrip. The total value of this debt was about 193 crore. Should you exit JSTI?
Turbulent times
According to an earlier Mint story, Amtek Auto reported a net loss of 157.60 crore in the June quarter and net sales of 854.22 crore. As of March, it had a total debt of 7,844.12 crore. Gautam Malhotra, managing director, Amtek Auto, had said the company was working on a debt reduction programme and planned to reduce it by at least 1,500-2,000 crore over the next couple of years. This would include infusion by promoters and the company raising funds. Malhotra also said that the promoters had infused 75 crore and would put in another 75 crore in next two months.
As a result of the poor performance, rating agencies took adverse action. CARE Ratings suspended its rating of the company on 7 August “as the company has not furnished the information required by Care for monitoring of the rating," the agency said in a release. Brickwork Ratings, too, had earlier downgraded Amtek Auto from ‘A+’ to ‘C’.
When a bond’s credit rating drops, its price, too, gets marked down as an adjustment, according to the formula that debt funds are mandated to use to value underlying securities. In other words, this is a mark to market loss. Amtek Auto has not yet defaulted on the principal payment to JP Morgan AMC.
Effect on MF scheme
JSTI’s net asset value fell because the bond’s price fell. Repeated efforts by Mint to speak with the scheme’s fund manager, Namdev Chougule, and the AMC’s chief executive officer, Nandkumar Surti, failed to draw a response. A distribution firm we spoke to on Friday, which had recommended JSTI to investors, said that a senior executive of the fund house they spoke to claimed that the AMC is confident of getting money back from Amtek Auto next month, when the bond is due for maturity. Whether that happens or not, JSTI is still in trouble. When the scheme was included in Mint50, it was managed conservatively, in line with its mandate. The fund had invested about 15% in ‘AA’ and equivalent rated assets. This proportion shot up to about 30% towards the end of July 2015. It invested about 14% of the portfolio in Amtek Auto in February, which increased to 15.37% in July.
At the time of JSTI’s inclusion in Mint50, Chougule had said, “The fund caters to the more risk-averse investor, who looks for a sort of assured return. The attempt is to graduate the fixed maturity plan type of investor, but also protect her downside risk." But the scheme has done just the opposite.
The scheme was retained in the July 2015 audit of Mint50 as the said debt was due to mature soon and there was no change in the credit rating. Clearly, this is a scheme that has veered away from its original mandate.
What should you do?
Late on 28 August, JP Morgan AMC issued a notice saying it will restrict redemptions from each of the two schemes to 1% of the total number of units outstanding on any business day. This means that 1% of units in each scheme will be made available for redemption, on a first-come-first-served basis. Units that don’t get redeemed, despite such requests, will be considered for redemption on the next business day, subject to the MF’s and its trustees’ approval.
“This restriction that the fund house has put is not in good taste. At the moment, Amtek Auto is 15% of JSTI’s portfolio and about 6% of JTF. If you assume the rest of the portfolio is liquid, then to open up just 1% of the corpus is restrictive," said Manoj Nagpal, chief executive officer, Outlook Asia Capital, a wealth management firm.
Vishal Dhawan, founder and chief executive officer of Plan Ahead Wealth Advisors, a Mumbai-based financial firm, said, “Investors also need to consider exit loads and short-term capital gains tax implications. Also, you may not be able to withdraw all your units in a hurry, given the exit restrictions."
“The company might tell JP Morgan AMC to roll over the debt. Then there won’t be a write-down of its NAV further. But who knows when the fund house will actually get its money," said a big distributor who did not wish to be named.
If the fund house is able to recover the principal and interest due in September, the fund would recover the mark to market loss it suffered last Thursday. But in case of a default, the schemes will see another, much sharper, fall in NAVs. Since the fund house hasn’t given us any clarity on the situation, predicting developments in the next few weeks is difficult.
In light of this uncertainty, it’s better to cut losses and redeem. This episode also highlights the need to diversify across asset classes, fund houses and even scheme categories. MFs are after all subject to market risks.
The content of the story has been changed to reflect Mint’s updated assessment of the schemes.
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