 "RBI cautious on corporate bond exposure")
As of September 2015, the exposure was 1.6 per cent; it rose to 1.8 per cent by end-March 2016.
After the Amtek Auto episode in August last year involving two of JPMorgan AMC’s schemes, followed by stricter norms from the market regulator, fund houses did a review of several of their holdings. And, strengthened their internal credit risk team.
“We are not relying on what a credit agency has to offer on a certain instrument. We are doing our own homework and thereby taking a call. One needs to remember that downgrading does not mean the instrument is junk. Rather, there can be opportunities,” said a fixed-income head of a large fund house.
The period, however, saw an increase of four per cent in exposure of debt-oriented MF schemes to corporate bonds. RBI's report cautioned, "While investment in corporate bonds offer higher returns, the risk premium might not be commensurate with elevated corporate stress as reflected in a large number of rating downgrades."
As on March, the total of assets under management (AUM) of debt funds exposed to corporate bonds were Rs 2.55 lakh crore against Rs 2.46 lakh crore in September 2015.
According to fund managers, apart from interest rate risk, fixed income funds are primarily subject to those from credit, concentration (aggregate exposure to one promoter) and liquidity. "Investors should not be tempted by only the yields or past performance; they should also look at portfolio quality," they say.
According to Rahul Bhuskute, head of structured & credit investments at ICICI Prudential AMC, "Credit investments (i.e in corporate bonds) are the largest asset class in the world and if it has worked everywhere else, there is no reason why it shouldn't in India. There are almost 400 credit (i.e non-government security) exposures in the MF sector and if an event has happened in one of these, it should not colour investor perceptions about all the others."
Fund managers acknowledge one good result of the Amtek Auto episode was in making everyone appreciate the risks associated with these investments. Credit as an asset class is relatively new as compared to equity and gilt among fund managers here and they'll have their own learning curves.
"I think credit funds, if managed well, have a potential of delivering consistent and reasonable return. They deliver returns predominantly from accrual i.e. from the yields of the underlying investments. They do not need any events (rate cuts, corporate earnings improvement, etc) to deliver returns. On the other hand, these are unlikely to be multi-bagger funds. The fund manager should ensure the consistency of returns in such a fund is not compromised by taking outsized exposure or by exposing the fund too much to interest rate risk," added Bhuskute.
