April 30 undoubtedly was a bad day for debt mutual fund investors. On the debt fund side, as many as 22 schemes, with a large number belonging to Reliance MF and the rest belonging to UTI MF, saw net asset value (NAV) drop by 2.5% to 6.7% in one single day. Another eight schemes belonging to either UTI MF or Reliance MF lost between 1% to 2.3% on the same day.

Since hybrid funds are also exposed to debt/fixed income assets, the reasons why debt funds were affected could have spilled over to hybrids as well. Three hybrid funds from Reliance MF stable have witnessed 1% to 3.4%, while four SBI MF hybrid funds have seen NAVs decline by 1.8% to 3.1% on April 30.

RupeeIQ will like to remind you that one-day fund performances should not form the basis of any fund selection or rejection. We cover these events just to help investors keep a track of their hard-earned money.

Debt trap

While it is difficult to pinpoint why the debt schemes fell by such a large margin on one day, regular readers of RupeeIQ have read about how Reliance MF schemes are exposed to group firms – Reliance Home Finance Ltd. (RHFL), Reliance Commercial Finance (RCFL) and Reliance Capital Ltd. (RCFL). Reliance Mutual Fund holds Rs 535 crore in RCFL and Rs 1,083 crore in RHFL. Reliance Mutual Fund also holds exposure of Rs 205 crore in secured long term NCDs of RCL.

Just a few days back, rating agencies downgraded debt securities belonging to these three entities. At that time Reliance MF said that interests of its investors are fully protected in group companies’ exposure. But the rating action has had an impact. The fund-house had said till maturity of the instruments, and in line with SEBI regulations, there will be a mark to market valuation impact on the above exposure, basis revised valuation provided by independent valuation agencies.

Is the April 30’s sharp drop a part of the valuation impact? Seems so. Responding to RupeeIQ query, a Reliance MF spokesperson said: “Once we receive the funds and securities are repaid, the valuation will be written back and all investors who remain invested in the MF schemes will not be impacted at all.”

Here is how 1-day return of 15 worst performing debt funds looks. The one day return is April 30 NAV over April 29 NAV. There are some more funds that have lost quite a lot of money. The worst hit was UTI Banking & PSU Debt Fund, whose NAV fell 6.7%. Others include Reliance Fixed Horizon Fund multiples series, and UTI Fixed Term Income Fund multiple series.

In late January this year,  ratings agency ICRA had downgraded UTI Banking and PSU Debt Fund, and 2 other UTI schemes (UTI Bond Fund and UTI Dynamic Bond Fund). It had also put them under ratings watch with negative implications by ICRA. ICRA noted that three debt schemes have exposure to IL&FS SPV namely Jorabat Shillong Expressway Limited.

As you can see above, most of these debt funds are Fixed Maturity Plans (FMPs). Most of them have been launched within the last two years. So, the horror show continues for FMP investors. A debt typically generates 6-7% a year. If a debt fund loses 3-4% in a single day, you can gauge the impact on returns if this trend plays out till the maturity of a closed-ended debt fund scheme. Investors in open-ended debt funds can still escape by selling the units back to the fund house.

Do recall that Kotak MF and HDFC MF some days ago had to devise new ways to hold back full redemption. Kotak MF paid out a portion of FMP redemption proceeds (and promised to pay rest later), while HDFC MF extended the maturity of its FMP by one year to avoid facing a fate similar to Kotak MF. These funds are exposed to corporate debt securities from groups like Essel (Zee) and IL&FS. Since they cannot repay the debt, the debt funds holding debt securities cannot pay investors.

About 15 more debt fund schemes have lost between 1% to 3.4% on April 30. This list contains UTI Dynamic Bond Fund, Reliance Strategic Debt Fund, UTI Bond Fund, Reliance Credit Risk Fund, and Reliance Ultra Short Duration Fund.

Hybrid hollow

Since hybrid funds are also exposed to debt/fixed income assets, the reasons why debt funds were affected could have spilled over to hybrids as well. Three hybrid funds from Reliance MF stable have witnessed 1% to 3.4%, while 4 SBI MF hybrid funds have seen NAVs decline by 1.8% to 3.1% on April 30.

Here is how 1-day return of 10 worst performing debt funds looks.

Disclaimer: The article is only for informational purposes. Investors are requested to consult their financial, tax and other advisors before taking any investment decision.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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