On social media like Twitter, experts are lambasting certain funds for their exposure to IL&FS debt securities. And for good reason. Credit risk funds have come under scanner, and BOI AXA Credit Risk Fund has been red-flagged for its investments. This Rs 1689-crore fund has finally marked down it’s complete IL&FS exposure to zero on October 5. As a result, in one single day, the debt fund’s NAV has plunged by 5.17%. This example shows the true ‘risk’ in these credit risk funds. Many argue that instead of experimenting with too many debt funds, retail investors should stick to simple categories like liquid funds. That debate is now back, as credit risk funds lose their halo.
BOI AXA Credit Risk fund event
Earlier called the BOI AXA Corporate Credit Spectrum Fund, the BOI AXA Credit Risk Fund was launched in 2015. It has had a simple journey until the IL&FS multiple defaults happened. As the financial institution defaulted on debt repayments, investors and analysts looked at mutual funds’ IL&FS debt exposure. Fixed maturity plans and credit risk funds were found to be holding quite a chunk. But over the last 2-3 weeks, it has become clearer that some funds were more hit than others.
Take the example of BOI AXA Credit Risk Fund. The debt fund has lost over 5% in one day. Reason? BOI AXA Credit Risk Fund did not immediately mark down the IL&FS exposure by 100%. In line with a few others, BOI AXA Credit Risk Fund took a 25% haircut on their exposure at first. Given that the October 29 maturity of its commercial paper exposure, BOI AXA Credit Risk Fund manager now thinks that it may not get its outstanding on the due date. Hence, effective October 5, the fund took 100% haircut on the entire outstanding of its exposure to IL&FS.
The question is not about the valuation policy or the timing. The real issue at hand is the safety of credit risk funds. If a debt fund, which is often marketed as a bank FD alternative, can lose over 5% value in one day, then is it the right product for retail investors? Certainly not. If fund managers take exposure to high-risk bets in a product (to be fair, IL&FS papers had AAA rating till recently, and MFs go by rating), such products are not at all suitable for retail investors, who were slowly opening up to the concept of debt funds sahi hai.
Credit RISK funds
The risk aspect of these credit risk funds has definitely come to the fore in last one month. We had senior MD and CEOs, not to forget CIOs, just some time ago asking investors to take a look at credit risk funds. If you are a new investor in credit risk funds, you will have plenty of reasons to be disappointed.
The one-month return of as many as five credit risk funds, as on October 5, was negative. You may ask why are we looking at one-month period? The reason is simple. If credit risk funds are debt funds, investors should know that returns in debt funds can be negative. In a bank FD of top banks, returns are never negative – not one day, one week or one month. Never. Your principal and interest are always protected.
But, credit risk funds have not done the same. In the last one month period ended October 5, BOI AXA Credit Risk Fund, Invesco India Credit Risk Fund, and DSP Credit Risk Fund have lost value. The loss in value is not in few basis point terms. BOI AXA Credit Risk Fund has lost 6.58% NAV in this period. The Invesco India Credit Risk Fund has lost 2.36%. The DSP Credit Risk Fund has lost 2.31%.
Credit risk funds invest in debt papers that are not extremely high rated. They take a risk in investing in debt papers they consider ‘value’. But the IL&FS issue is not about poorly rated debt papers. It is about investing in a poor company. Anybody covering infrastructure for the past few years will know that IL&FS had built a Rs 91,000 crore debt mountain, with asset liability mismatch. The mountain was always about to come apart, and it did. Only 13 AMCs had some exposure to IL&FS debt in some form as on August 31. On September 15, IL&FS started defaulting.
Why did these funds across 13 AMCs invest in IL&FS? BOI Credit Risk Fund has got the bad end of the bargain. It has suffered. This event shows that selection of debt securities is an extremely important subject. If debt MF managers depend on rating agencies while buying such instruments, it may be a good idea to do it yourself rather than outsourcing it to an external agency. Finally, the buck stops with the fund. Why should you pay money to the fund to just look at the ratings? You should not.
Proper track-record evaluation is very important. Investors in debt funds must not become adventurous. If your objective to safeguard money and get some extra returns without taking any risk, look at liquid funds only. There may be dozens of debt fund categories, but they are suited only for expert investors like big corporates. For small investors, a combination of short, credit and medium funds are enough.