Pandemic triggers crisis in mutual fund industry

Panicked investors have pulled a staggering ₹9,000 crore out of credit risk funds in just three trading days since Franklin Templeton India decided to shut down six of its debt schemes.

Assets under management (AUM) of credit risk funds have dropped 19% in the three trading days to 28 April, according to data compiled by Pulse Labs, a mutual funds data provider. That compares with ₹5,569 crore of outflows, or 10% of the total AUM, in the whole of March, which typically sees higher redemptions because ofyear-end sales by firms.

The credit risk fund category has been under tremendous stress of redemptions because its underlying assets are highly illiquid corporate bonds, many of them sold by companies struggling to keep themselves afloat during the 40-day lockdown announced by the government to limit the spread of the coronavirus. The collapse of Franklin Templeton’s debt schemes has added to panic redemptions.

To be sure, some of the outflows are also a result of writedowns, such as the one undertaken by Aditya Birla Sunlife Mutual Fund for its exposure to an Infrastructure Leasing and Financial Services Ltdspecial purpose vehicle.

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“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, chief executive of Aditya Birla Sunlife Mutual Fund.

The AUM of credit risk funds at the end of March was ₹55,380 crore. That has dropped to ₹40,000 crore as of Tuesday.

Medium-term funds, or debt mutual funds that invests in debt and money market instruments, also saw an AUM drop of ₹2,361 crore over the three days, a roughly 10% drop. 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 ₹2,483 crore in three days, ICICI Prudential Credit Risk Fund saw outflows of ₹1,973 crore, Aditya Birla Credit Risk Fund lost ₹1,005 crore and Kotak Credit Risk Fund ₹1,105 crore.

Fund managers say that the panic is unwarranted.

“Investors are redeeming money without adequate consideration of portfolio quality. 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,” said Lakshmi Iyer, chief investment officer (debt), Kotak Mutual Fund.

In an emailed statement, ICICI Prudential said that across various fixed income funds, more than 80% of its exposure is in AAA rated papers. 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 sides. 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 31 March). 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.

HDFC Asset Management Co. did not immediately reply to an email seeking comments.

In a report on Wednesday, Fitch Ratings said the funds classified as ‘credit risk funds’ are most at risk if redemptions continue. It said funds that have exposure to less liquid securities, such as unlisted securities, such as IL&FS, Religare Finvest are at increased risk.