Investing In Death Funds

Recently the NAV of many a debt fund was hit because of exposure to IL&FS.

I was tracking Reliance funds - whether they had exposure to ADAG companies, either in debt funds or in equity. 

Many articles mentioned that Reliance Nippon AMC, despite being part of Anil Ambani group of companies whose shares were falling like Humpty Dumpty and whose liquidity was in crisis, was safe from turmoil related to ADAG.

So it came as a surprise couple of days back w (Apr 30, 2019) Reliance Ultra Short Term Debt fund lost upwards of 1% in a single day. So much for the belief that an AMC is isolated from the vagaries of the group it belongs to.

Most of ADAG stocks have accelerated from midcap to small or micro cap in a relatively short period of time. Now I wonder whether Reliance Small Cap fund would have started to invest in their group stocks. God help investors. 

Gone are the days when debt funds were considered relatively safe. I wonder how they (AMC) decide the specific date when they take a hit or haircut. People who invest on that date are lucky and those who redeem on that day are unlucky. Should the fund get the money back later, the hair (NAV) will grow back later.

With things as they are in the debt market where CRISIL ratings, either of a fund or of the fund's underlying instruments, don't mean much I guess it's safer to invest in equity these days than in debt. Read here about UTI MF losses in debt schemes: https://m.economictimes.com/mf/mf-news/debt-trap-uti-debt-mutual-funds-continue-to-bleed-from-ilfs-blow/articleshow/69154841.cms

One thing I found interesting was that the % hiding in illiquid CP (Commercial Papers), those that are delinquent, increases when redeeme redemptions happen. Because of illiquidity, other liquid papers are sold, causing (a) AUM to decrease and hence (b) illiquid paper % to increase. Thus Tata Corporate Bond fund which earlier had 29%n exposure to DHFL papers dropped by 40% in NAV in a SINGLE DAY when the AMC took a 100% haircut for the scheme. 

Just like balanced funds sometimes have a very high exposure to small cap funds to increase returns, debt funds take exposure to risky (less than AA) papers to increase returns - occasionally resulting in capital loss. Yes even in death funds.

After Dewan Housing, it's now Indiabulls Housing https://www.moneycontrol.com/news/business/personal-finance/how-to-pick-the-right-debt-funds-to-suit-your-goals-timelines-4083321.html

A final thought. Even the Indian Meteorological Dept predicted the severity of Fani cyclone before it hit Indian shores. Is predicting liquidity crises in companies or being alert to embezzlements so difficult? Does the market not offer better people, than those in PWC or Deloitte, to review?

Additional Reading

1. ETimes: 32 mutual fund schemes had exposure to Yes Bank's now downgraded debt papers. Yes Bank's papers now
2. BloombergQuint: Side Pocketing In Indian Funds: Have We Finally Seen A Beginning?. https://www.bloombergquint.com/opinion/side-pocketing-in-indian-funds-have-we-finally-seen-a-beginning
3. https://wap.business-standard.com/live-market/mutual-fund/schemes-comparison?fAction=schemeCompare&fund_house1=3583&category1=27&scheme1=1581&fund_house2=21273&category2=13&scheme2=599&sch1=&sch2=HDFC+Balanced+Fund+%28G%29
4. https://www.business-standard.com/article/markets/amfi-s-mf-categorisation-rejig-pnb-embassy-reit-may-get-large-cap-berth-119061200363_1.html
5. freefincal.com: DHFL Crisis: Did UTI Mutual Fund act in the interest of investors?