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Photo: iStock

Credit risk funds lose 17% of their AUM in three days

According to data from Pulse Labs as of 28th April, there has been a 17% drop in AUM of credit risk funds in three days of trade - Friday, Monday and Tuesday

The stress in credit risk funds has worsened with 8210 crore of outflows in just three trading days since Franklin Templeton India decided to shut down six of its debt schemes.

According to data from Pulse Labs as of 28th April, there has been a 17% drop in Assets Under Management (AUM) of credit risk funds in three days of trade - Friday, Monday and Tuesday.

This figure is all the more startling as the month of March, which typically sees higher redemptions, had seen outflows of 5,569 crore or 10% of the total AUM.

The credit risk fund category has been under tremendous stress of redemptions due to a highly illiquid underlying corporate bond market. The shut-down of 6 credit managed income oriented schemes by Franklin Templeton has added to panic redemptions.

To be sure some of the outflows are also a result of write down, such as the one undertaken by Aditya Birla Sunlife Mutual Fund for their exposure to an ILFS special purpose vehicle.

"In general all credit funds have seen outflows. If you run the number for the industry you will figure it out, industry loss is very high," said A Balasubramanian, CEO, of Aditya Birla Sunlife Mutual Fund

The AUM of credit risk funds at the end of March stood at 55,380 crore and the AUM has dropped down to 40,000 crore as of Tuesday.

Medium term funds also saw an AUM drop of 2,361 crores over the past 3 days, a roughly 10% drop in AUM. Many of these funds hold low quality, illiquid papers as well.

The biggest drop in AUMs in absolute numbers was seen in the credit risk funds of the large Asset Management Companies (AMCs).

HDFC credit risk fund lost 2483 crore in three days, ICICI Prudential Credit Risk Fund 1973 crore, Aditya Birla credit risk fund lost 1005 crore and Kotak credit risk fund lost 1105 crore.

The fund managers and heads of fund houses say that there is an unwarranted panic selling.

"Investors are redeeming money without adequate consideration of portfolio quality. This kind of panic is unwarranted. In our case we have not had to sell a single AAA asset to meet redemptions, which shows the quality of even lower rated papers in our portfolio," Lakshmi Iyer, CIO (Debt), Kotak Mutual Fund.

ICICI Prudential in an emailed statement said that across various fixed income funds; more than 80% of its exposure is in AAA rated papers. In the statement it also said that in the past few months it has shored up liquidity and have no borrowings across the schemes

"We reiterate our credit risk fund portfolio is well diversified both on the asset and liability side. On the asset side, by having per instrument/per group exposure limit which is at 80 different securities with average exposure of around 1.25% to each individual issuer (Data as on March 31, 2020). On the liability side, by having limits on quantum of investment that can be accepted from a single investor capped at 50 crore," said a spokesperson for ICICI Prudential.

An email sent to HDFC for comments did not result in a response immediately.

In a report on Wednesday, Fitch Ratings said that the funds classified as "Credit Risk Funds" are most at risk if redemptions continue (their AUM declined by 10% in March).

Fitch said that funds which have exposure to less liquid securities, such as unlisted securities, and/or have demonstrably higher risk appetite through exposure to defaulted entities such as IL&FS, Religare Finvest, and/or Dewan Housing are at increased risk

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