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Debt funds are back in focus again. This time, investors in certain fixed maturity plans (FMPs) of Kotak MF that mature in April-May 2019 and possibly FMPs of other fund houses too, will not get their full redemption amount back on maturity.
Why? Ideally on maturity of an FMP, an investor gets the principal amount and return (accrued interest) on his investment. In this case, since the Essel Group (EG) has not been able to pay the dues on bonds issued by it, the FMPs investing in these bonds, in turn, will not be able to pay that portion of the realisable value of the debt securities to the investor.
“If you are an investor in an FMP which has an exposure in Essel group NCD backed by Zee shares as collateral, on maturity the principal and return accruing on other investments in the fund is paid back; the return (principal plus accrued interest) with respect to Essel Group will be retained in the scheme. Kotak AMC has extended some time to the company to repay the money with accrued interest, which when made will be paid back to the investors. The time extended by the fund house to EG is up to September 30,” explains Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra AMC.
In other words, you, as an investor, may not get returns you anticipated earlier. In case of Kotak FMP Series 127 maturing on April 8, the total AUM of the fund is ₹453 crore, of which ₹81 crore is the exposure to Essel. If one considers the current NAV of the fund, it would suggest that investors can lose nearly half the expected returns from the FMP, if the fund is not able to recover dues from the Essel group.
What are FMPs?
FMPs are close-ended MFs that one can invest in only during a new fund offer (NFO). As FMPs invest in debt instruments that have the same maturity as the fund, they help mitigate interest rate risk. But these funds carry credit risk. If the company issuing the bond defaults, the FMPs’ portfolio will be written off to that extent, impacting the value of investment at the time of maturity. Kotak FMPs’ exposure to Essel group can impact the value of investments, in case of a default.
“We were in constant dialogue with the company since January-end. We were aware of the upcoming maturity of our FMP - Kotak FMP Series 127 - maturing on April 8. In the first week of April when we took stock of the situation we realised that we need to extend some time allowance to the company,” says Lakshmi Iyer.
On being asked as to why investors were not given an indication of the issue in January itself, Lakhsmi Iyer explained that it is difficult to ascertain positively, whether there was a problem at hand then. “Our endeavour always was to ensure everything happens on time. The moment we realised the issue in April, we intimated the investors,” she said.
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