IL&FS has been bowling out star lenders, one after the other.
Now it’s UTI Mutual Fund facing the brunt.
As many as 8 of its schemes- UTI Banking & PSU Debt Fund-Reg(G), UTI Bond Fund-Reg(G), UTI Dynamic Bond Fund-Reg(G), UTI FTIF-XXIX-II(1118D)(G), UTI FTIF-XXVIII-X(1153D)(G), UTI FTIF-XXVIII-XIII(1134D)(G), UTI Hybrid Equity Fund-Reg(G) and UTI ULIP(G) have reported losses ranging from 0.8% to 6.7% in a single day.
Table1: UTI Mutual Fund: Receiving a big blow …
|Mutual fund scheme||Exposure (Rs in crore)||% of portfolio holding||One-day loss (%)|
|UTI Banking & PSU Debt Fund-Reg(G)||29.12||14.54||-6.7%|
|UTI Bond Fund-Reg(G)||37.46||5.56||-2.6%|
|UTI Dynamic Bond Fund-Reg(G)||44.51||5.94||-2.8%|
|UTI Hybrid Equity Fund-Reg(G)||30.60||0.53||-0.8%|
(Source: ACE MF)
These losses are on account of UTI Mutual Fund’s decision to mark down its exposure to the Jorabat Shillong Expressway (JSEL)-a Special Purpose Vehicle (SPV) of IL&FS. So far, the fund house has taken the haircut of 50% on its investments in the SPV.
Are these losses permanent?
Well at the moment, nobody knows.
| — Advertisement —
What’s Common Between Four of the World’s Top Five Companies?
If you look at the four of the world’s top five companies by market capitalisation – Apple, Alphabet (Google), Amazon, and Microsoft, you’ll find something amazing.
They are using one powerful strategy to scale their business all over the world, without any major costs involved.
Even Nike, Uber and Netflix are using the same strategy to kill their competitors mercilessly.
Want to know which Indian companies are using this strategy?
Click here and see yourself…
JSEL has been facing the insolvency suit, which is pending with the National Company Law Appellate Tribunal (NCLAT). Independent credit rating agencies have assigned the default rating (D) to the papers issued by JSEL.
The fund house believes once NCLAT passes the final resolution on the JSEL insolvency case, the company will resume the repayment cycle. Addressing its investors, UTI Mutual Fund exuded confidence “Current cash & bank balances of JSEL (lien marked to the debenture trustee) are more than sufficient to service liabilities of all senior secured lenders.”
The fund house also reiterated that being a senior secured lender, its loans to JSEL are supported by the annuities from National Highway Authority of India (NHAI).
How far can the IL&FS crisis drag?
IL&FS has been making headlines for last the eight months-ever since its subsidiaries defaulted on the debt obligation. In hindsight, it looks like IL&FS was destined for doom at some point. Unfortunately, none of the entities, including mutual funds, took the problems at IL&FS seriously.
When the story began to unfold in September 2018, mutual funds collectively had an exposure of Rs 2,130 crore to IL&FS and its group companies. As per the portfolios disclosed on April 30, 2019, mutual funds still hold IL&FS debt worth Rs 1,432 crore.
Will any sensible lender sanction loans worth Rs 91,000 crore to any entity whose parent company has the share capital of just Rs 9 crore?
However, mutual fund houses aren’t the only ones in hot water, Public Sector Banks (PSBs), and other state-owned entities are glaring at unimaginable losses, as all of them have sanctioned loans despite knowing this.
What’s the way forward?
For now, it hinges heavily on how all the stakeholders handle the situation. At a time when India’s entire financial system has been facing a liquidity crunch, writing down debt worth nearly Rs 1 lakh crore isn’t easy. The cascading effects can be enormous.
If there’s an unfavourable resolution and asset monetisation attempts of IL&FS and its subsidiaries fail or meet with a tepid response, lenders including mutual funds will have to take bigger haircuts. You should also stay away from other mutual fund schemes that have exposure to the toxic papers of IL&FS.
Table 2: Other debt schemes having exposure to IL&FS
|Mutual fund scheme||Exposure (Rs in crore)||% of portfolio holding|
|HDFC Dynamic Debt Fund(G)||40.5||5.78|
|Aditya Birla SL Credit Risk Fund-Reg(G)||131.04||1.85|
|Aditya Birla SL Dynamic Bond Fund-Reg(G)||66.44||1.64|
|Aditya Birla SL Regular Savings Fund(G)||35.5||1.56|
|Aditya Birla SL Short Term Opp Fund(G)||34.97||1|
|Aditya Birla SL Balanced Advantage Fund||22.19||0.78|
|HDFC Hybrid Debt Fund(G)||20.5||0.66|
|HDFC Short Term Debt Fund(G)||18.75||0.24|
|HDFC Banking and PSU Debt Fund-Reg(G)||4.25||0.14|
|HDFC Credit Risk Debt Fund-(G)||21||0.13|
(Source: ACE MF)
Schemes with higher exposure (as a percentage of the portfolio) are more vulnerable as compared to those with nominal exposure. For example, HDFC Dynamic Debt Fund(G) may report steeper write-offs if it fails to recover money from IL&FS as compared to HDFC Credit Risk Debt Fund-(G), which has a comparatively lower exposure.
Isn’t it unusual that a dynamic bond fund has made higher investments (as a percentage of the portfolio) in a vulnerable company as compared to the one made by a credit risk fund? This is another indicator of how miserably mutual fund houses and their fund managers have misjudged the risk involved in debt propositions.
Various media reports suggest that IL&FS has 169 subsidiaries, which include 135 indirect ones and SPVs. Is lending to subsidiaries with unsustainable businesses justified just because IL&FS’ promoter group has some marquee names such as LIC, HDFC, and SBI?
It seems mutual fund managers believe they can get away with anything.
So far, that may be true. But, if IL&FS debt fiasco worsens hereon, mutual funds have plenty to lose.
Investors should stay away from debt funds given the severity of the on-going corporate debt mayhem.
Editor’s note: Avail a fully readymade wealth solution with 7 ultra-strategies to boost your gains in 2019.
Our premium mutual fund research service FundSelect Plus underwent a major overhaul (as demanded by our research team) and it looks more powerful than ever.
Focusing on new-age investment strategies, instead of mere portfolios, it aims to provide you with an all-in-one investment solution to meet almost EVERY financial goal you have.
Comprised of SEVEN investment strategies (added with FREE bonuses worth in thousands), this is probably the best investment you could make.
Want to start building your financial future today itself? Click here to get started.
Author: PersonalFN Content & Research Team
This article first appeared on PersonalFN here.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.