Principal Mutual Fund registers 4-6% drop in NAV of three debt schemes overnight
2 min read 01 May 2020, 02:32 PM ISTThe asset management company may have been a victim of overall redemption pressure that has been affecting debt mutual funds across the industry
PremiumMultiple schemes of Principal Mutual Fund recorded sharp fall up to 6% overnight on 30 April as the fund house completely wrote down its exposure to DHFL, which had only been partially written down previously. The highly impacted schemes are Principal Credit Risk Fund, Principal Low Duration Fund, Principal Dynamic Bond Fund and Principal Short Term Debt Fund. The NAV drops in them are 6.29%, 5.72%, 4.22% and 5.69% respectively. Principal MF is a relatively small fund house. The schemes had assets under management of 32 crore, 117 crore, 29 crore and ₹134 crore respectively.
Principal Mutual Fund had marked down DHFL paper by 75% in late 2019 but a residual 25% value remained in the portfolio. A note put out by the AMC made reference to the likelihood of the DHFL insolvency resolution process being delayed and erosion in the value of the residual DHFL business due to the lockdown. It further added that trading in deactivated ISINs of matured NCDs is not possible currently.
The note further made reference to redemption pressures on debt funds across the industry and possible continuing redemptions in its own debt funds which can lead to a higher concentration of this residual DHFL paper. Concentration rises when mutual funds sell off better rated and more liquid paper is to honour redemptions. This leaves riskier paper in the portfolio in greater proportion for remaining investors.
“We used the valuation provided by the third party valuation agencies and did not mark it down earlier as DHFL debt was being traded in the market in December-Feb at similar valuation to what it was valued at in our schemes. Current market conditions have had an impact on liquidity of lower rated debt. At the time of the default in June, side pocketing was not enabled in our funds. The portfolios of our fixed income funds are high quality and liquid, and comprise of TREPS, bank CDs and high rated corporate debt," said Rajat Jain, CIO, Principal Mutual Fund.
The Principal Mutual Fund note also listed two hybrid schemes as being impacted by the DHFL write down - Principal Hybrid Equity Fund and Principal Balanced Advantage Fund. However it put the NAV impact of the write down on the two schemes at just 0.4% and 0.3% respectively.
Investors redeemed around ₹25,000 crore from debt funds (excluding liquid and overnight schemes) in the three working days following the surprise winding up of 6 Franklin Templeton debt schemes. Selling was more concentrated in the credit risk space which saw redemptions of around 9,000 crore in the three days - roughly 20% of the total assets held in the category. “Investors should not be adventurous with debt for a few percentage points of return. Pay careful attention to what's in the portfolio and both issuer and group concentration as well as old exposures that may only have been partially written down," said Amol Joshi, founder, Plan Rupee Investment Services.
