A day after capital markets regulator SEBI introduced new caps for debt mutual funds on their investment patterns, asset managers say the rules deal well enough with concentration risk, but not credit risk. The chances of the fund industry being affected by an Amtek Auto-like default again still exist.
Offers partial solution SEBI created the new norms after the auto ancillary company Amtek Auto defaulted on ₹200 crore worth of debt that JP Morgan mutual fund had bought. At the time of the default, 15.4 per cent of the assets of the JPMorgan India Short Term Income Fund scheme was invested in Amtek Auto debt paper. In the other India Treasury Fund, 5.3 per cent of assets was invested in Amtek Auto.
The new cap for a single issuer (here, Amtek Auto) is 10 per cent of a scheme’s assets. Fund managers say the new investment caps may partly buffer the impact of another default on investor money, but doesn’t reduce the risk of the default itself.
Yadnesh Chavan, Fund Manager — Fixed Income, Mirae Asset, says the new limits will force fund managers to create diversified credit portfolios, similar to diversified equity funds that exist now. Lakshmi Iyer, Head — Fixed Income, Kotak Mahindra AMC, agrees, saying that a new debt scheme’s portfolio would have to include about 9-11 issuers now, up from seven earl.
Contours of risk “The fixed income segment grew tremendously in the last four years as an alternative to bank deposits. As a lot of retail and HNI money came in, credit risk in lower-rated issuers rose. SEBI has rightly defined the contours of risk, with regard to the issuer, group and sector,” according to Pankaj Sharma, Head of Business Development and Risk Management, DSP BlackRock. “But the risk of any security going bad, or if a rating downgrade happens, rests with the fund house. Risk management continues to be very important.”
The revision in a debt scheme’s credit exposure will apply immediately to new schemes and new investment in existing schemes. SEBI has cut the investment limit in a single issuer (that is, debt issued by a single company) from 15 per cent to 10 per cent, which can be extended to 12 per cent with trustee approval.
A new limit has been introduced on investments in a single corporate group (group being the entity, its subsidiaries, fellow subsidiaries, its holding company and its associates) at 20 per cent, extendable to 25 per cent with trustee approval. Public sector issuers are exempted from this. Sectoral exposure by a scheme is capped at 25 per cent now, from 30 per cent earlier. In order to limit the risk arising from housing finance companies, the additional exposure limit to this sector is capped at 5 per cent now, down from 10 per cent earlier.
Diverting to riskier assets Another concern is a lack of clarity about whether related parties fall under the group classification. One fund manager who did not wish to be named, said: “Are Anil Ambani’s ADAG and older brother Mukesh’s RIL related parties? Do they come under a single group classification? Also, earlier I could construct a portfolio with multiple Tata group companies, but now I can’t do that even if they are all highly rated. And by limiting sectoral exposure to the highly-rated financial services industry (banks and NBFCs), SEBI is ultimately diverting investor money into riskier sectors.”
Issuers of debt — mostly corporates — have cause for worry too. They might face selling pressure on their bonds by mutual funds trying to offload investments to comply with the new norms. HDFC, one of the largest issuers of debt paper, informed stock exchanges on Tuesday that only 3.9 per cent mutual fund debt assets are invested in its papers, well within the 10 per cent limit. Indiabulls Housing Finance released a statement saying the equivalent industry figure for them is 1.03 per cent. Fund managers believe new issues by lower-rated corporates may run into trouble also, forcing them to turn to bank financing instead.