Credit risk funds lose a fifth of their assets in just 3 days

Mumbai: In the staid world of debt funds, they were the equivalent of Savile Row suits – until last week. Since Franklin Templeton abruptly pulled the plug on six debt schemes, the money under management at Mumbai’s high-yielding credit risk funds has shrunk by about a fifth in just three working days.Pronounced outliers in the debt basket, credit risk funds yielded significantly higher returns than normal debt funds because of their bets on higher-risk bonds. In times of stress, however, the risks appear to have outweighed rewards, upending the riskiest end of the debt market.Data by industry body AMFI showed that assets under management (AUM) of credit risk funds fell to Rs 39,510 crore on April 28 from Rs 48,576 crore on April 23, when Franklin Templeton made its surprise winding-up announcement after trading had long ended that day in a locked down Mumbai. The AUM decline factors in both the impact of redemptions and shrinkage in net asset value of units.To be sure, AUM in this category fell from Rs 79,640 crore in April 2019 to Rs 55,380 crore in March this year, indicating a gradual waning of investor appeal. The credit risk fund category accounts for about 5 per cent of the debt mutual fund assets of Rs 11.48 lakh crore.75462348“There is flight to safety and investors do not want to take any risk. Since the credit risk category carries the maximum risk, savers are moving to safer categories, like overnight or liquid funds,” said Gajendra Kothari, founder, Etica Wealth.To ensure the fall is not precipitous, the central bank offered mutual funds a Rs 50,000-crore lifeline earlier this week. But that might not help fund houses much because the quality of residual paper now held by them wouldn’t qualify the rating-threshold test at the banks supplying the money as the fund houses have sold the best quality paper they had.Financial advisers are also being rather circumspect in the current environment, where capital protection has assumed greater significance than capital appreciation. “In a weakening economic environment, investors should not take risk in debt funds and stay away from credit funds,” said the product head at a wealth management firm.

from Economic Times https://ift.tt/3cZKkql