Shocking for Debt Mutual Fund investors – Jindal Steel and Power securities downgrading
Mutual fund investors think that income mutual funds (debt funds) carry low or almost zero risk as they do not invest in equity markets. Five months back, JP Morgan Mutual fund house has restricted redemption of their 2 debt fund schemes due to downgrading of Amtek Auto by credit rating agencies. Its schemes NAV have fallen due to this downgrading. Now one more shock to mutual fund investors of debt mutual fund schemes where NAV is impacted due to downgrading of Jindal Steel and Power debt instruments. What is happening to debt / income mutual funds these days? Does income mutual funds would become riskier going forward? I would provide some tips to safeguard your money.
Also Read: Top Income Mutual Funds to invest in 2016
What exactly happened to Jindal Steel and Power securities?
Few days back, CRISIL, credit rating agency has downgraded Jindal Steel and Power from BBB+ to BB+. This is a three notch downgrade. (Hierarchy is BBB+, BBB, BBB- and then BB+). Its huge downgrading. Any debt papers below BBB- is considered as junk grade.
- Generally a debt / income mutual fund schemes invest in debt instruments of corporates.
- Due to the downgrading of Jindal Steel and Power debt instruments, as per SEBI norm of valuation of NAV, funds which invested inthese securities were forced to mark down and there is a decline in NAV of mutual fund schemes which have invested in such debt securities.
- Some of the select mutual fund schemes from Franklin Templeton has high exposure to Jindal Steel and Power debt instruments and it has seen dip of 0.75% to 1.5% of their NAV.
- ICICI Prudential Fixed Maturity Plan also holds JSPL Securities and its NAV have dipped by almost 3% in last 2 weeks.
- Till 6 months back, mutual fund industry has not seen such downgrading on debt instruments and decline in NAV’s due to such risks.
What do mutual fund houses say about this shocking news?
Franklin Templeton, in a note emailed to all distributors, defended its investments in JSPL and said that
"Investors may note that it is a performing debt security and the impact on price is solely driven by the recent rating action. We continue to take comfort from the operating track record of management and promoter. In our view, some of the prudent measures like refinancing under 5/25 and cost optimization along with the imposition of minimum import prices and increase in domestic coal supply will significantly benefit the company in the medium term and improve its debt servicing ratios and credit profile."
Franklin Templeton said it held commercial paper of JSPL aggregating to Rs 1,300 crore in their funds and the company has made the repayments on time so far.
Should an investor be worried about such downgrading?
This is a rare incident happened now. Of course, investors should worry about this incident as it impacts their returns.
- Due to such downgrading, returns are impacted by 0.5% to 3%.
- There is nothing much an investor can do when such incident happens except redeeming / selling their mutual fund units. In case you have invested in fixed maturity plans, you need to wait till your scheme gets matured.
- While market regulator SEBI would keep an eye, investors of these mutual fund schemes should have close eye on their investments.
- Generally, such mutual fund schemes would diversify their investments and does not invest huge amounts in a single company or debt instrument. Hence, the impact on your debt income mutual funds would be small.
- Banks have been making increasing provisions for NPA’s for such companies. Hence an investor should be careful and take necessary steps to safeguard their investments.
Some smart ways to invest in income mutual funds and safeguard your money
Mutual funds provide good returns in the long run. Debt / Income mutual funds on the other hand provide higher returns compared to other fixed income options and carry low risk. Here are some tips on how you can safeguard your money.
- An investor can diversify their debt portfolio by investing in 4-5 debt funds instead of just one scheme. I feel one should not invest more than 20% of their debt portfolio in one debt mutual fund scheme.
- In case you are parking your funds for short term of less than 1 year, it is advised to invest in liquid funds instead of debt funds.
- If you are investing say Rs 10 Lakhs in debt mutual fund, you can invest in 4-5 schemes instead of parking in single fund (Rs 2 Lakhs x 5 funds). Assume that your fund is at risk and returns dipped by 3% i.e. Rs 200,000 x 3% = Rs 6,000. Means, on your overall debt portfolio of Rs 10 Lakhs, it would be just Rs 6,000 i.e. 0.6% negative impact.
Conclusion: Definitely this is not a good sign for mutual fund investors who believe that Debt Mutual Fund schemes are safe investment options. Diversifying into 4-5 debt mutual fund schemes would help you to reduce your risk. While this is rare incident, looking at the increasing NPA’s being projected by Banks, it is always better to safeguard your investment by considering these tips.
Readers, what is your view of such sudden, shocking news from ratings downgrade which has happened a few days back? Do you feel there are any better ways to handle such instances?
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Debt Mutual Fund Returns dip due to company ratings downgrade