Last week, the unthinkable happened for investors of debt mutual funds. Most of the 165 mutual fund schemes across 24 asset management companies (AMCs) that were exposed to debt issued by DHFL group as of 30 April had to write down the value of their holdings by 75%. As a result, the value of several of these schemes fell sharply, with one of them, DHFL Pramerica Medium Term Fund, falling by more than half, 52.99%.
The write-down happened because DHFL failed to make some interest payment on time, which was treated as a default. DHFL subsequently made some payments but its financial future remains cloudy.
Lesson 1: Size matters
Small debt mutual funds have taken the maximum hit from the debt crisis. Large funds have also had exposure to some of the troubled groups, but their sheer size cushioned the impact to a large extent. For example, the size of some of Franklin Templeton Asset Management (India) Pvt. Ltd schemes shielded them from heavy losses though they had exposure to the Essel group. Individual debt papers, typically, have a ticket size of around ₹5 crore; this means that a scheme needs to be at least ₹100 crore in size to keep exposure to one particular paper low.
This problem has particularly affected fixed maturity plans or FMPs, many of which have portfolios in the ₹50 crore- ₹100 crore range. This is a result of the short window period in which they are able to collect money from investors. After the launch period, they are closed for a fresh subscription.
Lesson 2: Category matters
If you wish to minimize your risk, we would recommend you to stick to debt mutual funds categories where the credit quality is good. For instance, corporate bond funds are mandated to hold 80% of assets in AA+ and above rated papers, while banking and PSU debt funds focus on the debt of government-owned companies. Please note this is not a foolproof method and schemes in both categories have been hit by bad debt but it can reduce the risk of rating downgrades.