The recent events at Franklin Templeton Mutual Fund may have increased the risk of redemptions in debt funds, but a gradual reduction in exposure towards riskier issuers in the last year and a half could limit any further downside risks.
According to Morgan Stanley, mutual funds have gradually moved towards better assets after the IL&FS crisis came to the fore in September 2018 and hence should be able to tide over the current crisis.
“Recent events at credit risk funds have increased risk of redemptions at debt mutual funds. However, we think a big shift in the AUM mix over the past 18 months towards stronger borrowers should mitigate this risk,” stated a note by the global financial major.
Morgan Stanley further highlighted the fact that non banking finance companies (NBFCs) and housing finance companies (HFCs) that, till last year, constituted a big part of the assets under management (AUM) of debt schemes now account for a much lesser share.
“... driven by decline in AUM as well as risk aversion and regulation, mutual funds have been cutting debt exposure to NBFCs/HFCs (down approximately 45% from the peak in July-Aug 2018) with even sharper cuts (down around 90%) to entities in real estate financing, promoter financing etc, which are down to around 1.5% of mutual fund debt AUM,” said the report released on Monday.
Last week, Franklin Templeton Mutual Fund decided to wind up six debt funds with combined AUM of nearly ₹26,000 crore on account of illiquid, low-rated instruments in the portfolio.
Further, the fund house said that it decided to wind up the schemes to preserve the value at least at the current levels. Erosion of value was taking place due to redemption pressures as well as mark-to-market losses due to lack of liquidity on account of the COVID-19 impact on the markets.
Meanwhile, Morgan Stanley’s analysis showed that about 80% of the NBFC or HFC paper held by mutual funds maturing over the next 12 months have strong parentage while those facing funding constraints constitute only 5% of the overall mutual fund exposure towards the sector.
The financial major, however, noted that while the dependence of the NBFC/HFC segment on mutual funds has decreased, such potential outflows would coincide with banks’ turning risk-averse towards NBFCs .
