\n\n\n\nImpact on NAV calculated as on the day of announcement of write off of the respective fund house
\n(Source: HSBC Mutual Fund, Principal Mutual Fund, AMFI)\n\n<\/p>\n\n\n\n

Reason for write off<\/strong><\/p>\n\n\n\n

DHFL has defaulted on various debt \nobligations as it was facing severe cash crunch and huge pile up of \nloans. Following this, the company’s credit rating was downgraded from \n‘AAA’ to ‘D’ last year. The company was then forced to sell its non-core\n assets to pay off its debt and manage liquidity. It is currently \nundergoing an insolvency resolution process initiated by RBI.<\/p>\n\n\n\n

In the interest of investors PMF and HSBC MF decided to completely mark down exposure to DHFL for the following reasons:<\/p>\n\n\n\n

1. Financial markets are rife with high volatility and uncertainty due to the outbreak of COVID-19 leading to heightened redemptions. The liquidity conditions in debt market have tightened since March due to high redemption pressure, especially for lower rated securities <\/li>
2. Fund houses expect continued dislocation of businesses and erosion in value of the residual business of DHFL due to lockdown <\/li>
3. The lockdown could also delay the insolvency and bankruptcy proceedings against the company, which means the resolution is likely to be deferred <\/li>
4. Continued redemptions in debt funds is expected go on for a prolonged period. Hence the risk of rising concentration of stressed assets like DHFL in the portfolio is high as these cannot be offloaded <\/li>
5. There are trading\/settlement restrictions applicable on matured NCDs <\/li><\/ol>\n\n\n\n

   Credit risk has amplified due to COVID-19 \ninduced lockdown. Numerous borrowers are facing a cash flow crunch due \nto halt in business operations and low demand. Hence, there is a strong \nlikelihood of delay in repayment of principal and interest.<\/p>\n\n\n\n

   The moratorium provided to borrowers by \nRBI can delay the good loans from turning into bad. However, if even \nafter the moratorium if lenders are not able to recover the amount, \nbanking and finance sector may become overwhelmed with the financial \nstress.<\/p>\n\n\n\n

   [Read:<\/strong> How an Extended Lockdown Has Amplified Credit Risk<\/a>]<\/p>\n\n\n\n

   In such a scenario, risk aversion by \nlenders has risen and they are taking necessary steps to prevent pile up\n bad loans. Write off of securities is one such step.<\/p>\n\n\n\n

   In the coming days we may witness other fund houses with exposure to stressed assets such as DHFL marking down their exposure.<\/p>\n\n\n\n

   However, the write off does not mean that \nfund houses will not make any attempt to recover the amount. Any future \nreceipt of cash flows from the securities will be credited back to the \nrespective funds.<\/p>\n\n\n\n

   What should investors do?<\/strong><\/p>\n\n\n\n

   Debt mutual fund investors are not feeling as confident after previous incidents of exposure to toxic papers<\/a>.\n The recent collapse of debt schemes of Franklin Templeton MF could make\n them even more wary about their investment in debt schemes. As a \nconsequence, there may be some panic selling in other debt schemes by \ninvestors worried about their funds getting locked.<\/p>\n\n\n\n

   However, instead of taking any hasty decisions, it would be a great idea to check your funds for the quality of assets it holds.<\/p>\n\n\n\n

   In this market environment, it would be \npreferable to invest in instruments issued by government and public \nsector enterprises, and stay away from those having high exposure to \nprivate issuers.<\/p>\n\n\n\n

   Choose a fund house that follows prudent \ninvestment process and stringent risk-management system. In these \nuncertain times, it would be wise to stick to liquid funds and overnight funds<\/a> for\n the fixed-income part of your portfolio because they have more \nliquidity and carry lower risk. Alternatively, if you prefer safety of \ncapital, invest in Bank fixed deposits.<\/p>\n\n\n\n

   Before investing in debt funds understand \nthe various risks involved and invest in schemes where the portfolio \nrisk aligns with your own risk appetite and financial objective.<\/p>\n\n\n\n

   At PersonalFN, we arrive at top rated \nfunds using our SMART Score Model. If you wish to select worthy mutual \nfund schemes, I recommend you to subscribe to PersonalFN’s unbiased premium research service, FundSelect<\/a>.<\/p>\n\n\n\n

   Additionally, as a bonus, you get access to PersonalFN’s popular debt mutual fund service, DebtSelect.<\/p>\n\n\n\n

   If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!<\/a><\/p>\n\n\n\n

   This article first appeared on PersonalFN\u00a0here<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"

   The wait for troubles to end in debt schemes seems to be getting longer with each passing day. Various categories of debt funds such as Credit Risk Funds, Medium Duration Fund, and Low Duration Fund, etc. witnessed strong outflows in April on Franklin Templeton Mutual Fund shock leading to significant erosion in assets. In another…<\/p>\n","protected":false},"author":5,"featured_media":1917,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"cybocfi_hide_featured_image":""},"categories":[3],"tags":[],"_links":{"self":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/1916"}],"collection":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/comments?post=1916"}],"version-history":[{"count":1,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/1916\/revisions"}],"predecessor-version":[{"id":1918,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/1916\/revisions\/1918"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/media\/1917"}],"wp:attachment":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/media?parent=1916"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/categories?post=1916"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/tags?post=1916"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}