debt defaultAmong mutual fund houses, exposure to DHFL group is highest in UTI Mutual Fund (over Rs 1,900 crore), followed by Reliance Nippon (over Rs 1,100 crore), Franklin Templeton (over Rs 500 crore), Axis MF (over Rs 400 crore), L&T (over Rs 300 crore), DHFL Pramerica and DSP Mutual Fund (over Rs 200 crore each). HDFC MF and ICICI Prudential MF do not appear to have any meaningful exposure.

Put together, there are about 160 odd schemes that are exposed to DHFL as of 30th April 2019. The cumulative exposure is in the tune of over Rs 5,000 crore across two dozen fund houses. Importantly, over 100 MF schemes have an exposure of over 5% of assets. Such highly exposed schemes are first in line to get sharply impacted when things go south. And, this has already happened.

While an official explanation is not available, DHFL is said to have missed over Rs 900 crore in interest payments. Non-payment of interest payments is technically considered as default. As per current rules, a default or ‘D’ rating belong to financial institutions means a straight 75% haircut.

A DHFL spokesperson said a delay in payment is the more correct way to describe the situation.

The most impacted debt funds include DHFL Pramerica Medium Term Debt Fund (NAV down 53%), DHFL Pramerica Floating Rate Fund (down 48%), Tata Corporate Debt Fund (down nearly 30%), Baroda Treasury Advantage Fund (down 17%), JM Low Duration Fund (down 10%), BNP Paribas Medium Term Fund (down 12%).

Do note that delay by custodians in updating NAVs has meant that – as we write the story – the updated June 4 NAV for a couple of fund-houses like Edelweiss MF and JM Mutual Fund are not available. Hence, the NAV impact has not been captured below. But, once the NAVs are declared by funds (Wednesday is also a holiday), you can check the 1-day NAV decline percentages.

Below is a list of debt schemes that have substantial exposure to DHFL. The 20 schemes mentioned here have between 9% to 37% exposure. Naturally, the drop in NAV value on June 4 compared to June 3 has been huge in some cases.

DHFL credit saga effect – Most exposed 20 debt funds (open-ended)
Scheme name DHFL exposure as % of AUM 1-day NAV change (June 4 over June 3)
DHFL Pramerica Medium Term Fund 37.4 -53 %
DHFL Pramerica Floating Rate Fund 31.9 -48.4%
DHFL Pramerica Short Maturity Fund 30.4 -13.5%
Tata Corporate Bond Fund 28.2 -29.7%
Baroda Treasury Advantage Fund 21.1 -17.1%
DHFL Pramerica Low Duration Fund 20.1 -16.5%
Principal Low Duration Fund 19.2 NAV not available for June 4
JM Low Duration Fund 18.9 -10.2%
Edelweiss Corporate Bond Fund 15 NAV not available for June 4
BNP Paribas Medium Term Fund 14.8 -12.8%
Tata Medium Term Fund 14.6 -12.3%
JM Income Fund 13.15 -9.6%
Baroda Dynamic Bond Fund 12.9 -8.3%
Edelweiss Low Duration Fund 12.16 NAV not available for June 4
Principal Short Term Debt Fund 10.94 NAV not available for June 4
Edelweiss Short Term Debt Fund 10.73 NAV not available for June 4
HSBC Short Duration Fund 10.24 NAV not available for June 4
Principal Dynamic Bond Fund 9.79 NAV not available for June 4
IDBI Credit Risk Fund 9.54 -7.1%
Reliance Prime Debt Fund 9.44 -0.88%
Source: Industry, individual AMCs

Apart from these 20 funds, there are others like UTI Short Term Income (down 9.4%), UTI Treasury Advantage Fund (down 8.8%), LIC MF Savings Fund (down 6.1%), Union Corporate Bond Fund (down 5.6%), Sundaram Low Duration Fund (down 5.5%) and DSP Bond Fund (down 5%) that seen sharp drop in NAVs.

There are a bunch of fixed maturity plans (FMPs) from UTI, Reliance, Aditya Birla Sun Life, DHFL Pramerica and Tata that have fallen quite a bit. FMPs are close-ended products, which means investors have very little to do.

What to do now – road ahead

Impacted debt MF investors have a tough situation on their hands. If fund-houses have taken a 75% write-down on their exposure, this means a majority of the pain is already reflected in the scheme NAV. Yes, a 25% of the pain is still left, but that’s any day better than 75% pain.

You have two options in front of you. One, exit. Two, stay put. Before telling what to do, let us understand some more about how debt funds are exposed to DHFL and the likely scenarios. To help gain better insights, RupeeIQ spoke with a noted debt manager in one of the top 10 fund-houses. The fund manager shared a few key insights.

1. From a rating perspective, payment delay of even one day is considered a default.

2. Some of the exposure of fund-houses is secured. This means fund-houses have 1.5 times cover on DHFL’s loan book and receivables. It is a pari passu charge. This means mutual funds are a secured lender to DHFL.

Additional Read: After FD rating downgrade, DHFL puts on hold acceptance of all fresh deposits and renewals (May 22)

RupeeIQ take

Argument for staying put – Existing investors have taken the brunt of the downgrade and provision. Redeeming your investment is not going to help your case. Because this would mean the investor would actually be booking the loss. Right now, the NAV drop is a notional loss. There are news reports that are saying DHFL is expecting some fund inflow next week. This information has neither been confirmed or denied by DHFL.

One thing is for sure, DHFL is trying to turnaround. In case that happens, there is a possibility of write-back of asset value for funds. Funds have made provisions today assuming the worst case scenario and low recovery rates. This may not be that bad in a practical sense, and the recovery rates could be higher. Any investor who exits will not be able to participate in that possible ‘upside’.

Argument for exiting – Investors may think they did not sign up for large losses in debt funds. That is true to some extent. The risk in debt funds has so far turned out to be higher than traditional alternatives. Should you wait for another 25% value downgrade? This is a call you have to take based on your conviction on whether DHFL will be able to turn around.

If you feel, the rock-bottom has not been hit in this issue and you are in no mood to experience further losses, by all means, do exit. That could mean you book a large loss. Any loss beyond 5-10% would definitely hurt. No words can console you. But, you can consider staying put.

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

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on contact@rupeeiq.com