Half a year ago, the IL&FS fiasco rocked the debt markets. Debt schemes invested in the assets lost as much as 5% of their NAV in a day. In an earlier blog, we had highlighted that there may be more pain ahead for debt mutual funds as over Rs16,000 crore worth of investments lie in securities of pained companies like that of Essel, DHFL and the IL&FS group.
Now, certain Fixed Maturity Plans (FMPs) are delaying full redemption or extending the maturity, given the debt woes of the Essel group.
Kotak FMP Series 127 and 183 that matured on April 8 and April 10 had an exposure of nearly 18% and 19%, respectively, to the Essel Group. The fund house will repay the money as and when they receive it from the Essel Group companies.
Such risk is inherent, when investing in lower quality bonds with the aim of generating higher yields and accrual income. But, very rarely do investors look at the indicative portfolio allocation before investing and understand the risk associated with such investments.
For example, Kotak FMP Series 183, which was launched in December 2015, in its SID indicated that it would invest 95-100% in A-rated assets, signifying very high-risk.
Kotak FMP Series 127 was launched in November 2013, and after an extension, the total tenure of the scheme worked out to 1957 days and maturing on April 08, 2019. At the time of launch, the portfolio indicated that it would invest 45%-100% in A and AA rated assets.
Schemes of other fund houses have investments in Essel group assets, leading the asset managers to take remedial measures.
The maturity date of HDFC FMP 1168D February 2016 (1), a Plan under HDFC FMP – Series 35 has been extended by 380 days. HDFC MF, states that the rollover is considered “Given the current interest rate scenario and portfolio positioning, the yields prevailing in the short maturity bucket present an option for investors to lock in their investments at current prevailing yields.” However, the scheme also has an allocation of 9.98% to Essel Group securities.
More Pain Ahead…
The below schemes have an allocation to Essel group companies. They are expected to mature in the coming months. If Essel fails to meet its obligations, investors in these schemes may not get full redemption, and in certain cases, the maturity date can be postponed.
Exposure to ESSEL Group Debt
| Scheme Name | Value (Rs Cr) | Allocation (%) | Open Date | Maturity Date |
|---|---|---|---|---|
| Kotak FMP-187-1146D | 104.62 | 21.01 | 24-Feb-16 | 15-Apr-19 |
| HDFC FMP-XXXV-1168D-Feb 2016(1) |
33.80 | 9.98 | 02-Feb-16 | 15-Apr-19 |
| Kotak FMP-189-1154D | 12.41 | 10.10 | 18-Feb-16 | 17-Apr-19 |
| HDFC FMP-XXXV-1148D-Feb 2016(2) |
44.46 | 10.91 | 04-Mar-16 | 24-Apr-19 |
| HDFC FMP-XXXV-1161D-Feb 2016(1) |
86.50 | 10.23 | 25-Feb-16 | 30-Apr-19 |
| HDFC FMP-XXXV-1140D-March 2016(1) |
32.32 | 9.13 | 17-Mar-16 | 30-Apr-19 |
| Kotak FMP-193-1098D | 26.93 | 10.89 | 29-Apr-16 | 2-May-19 |
| Kotak FMP-194-1099D | 24.24 | 11.54 | 11-May-16 | 15-May-19 |
| Reliance FHF-XXX-8-1192D | 27.36 | 14.71 | 29-Feb-16 | 5-Jun-19 |
| Reliance FHF-XXX-11-1169D | 43.00 | 14.13 | 23-Mar-16 | 5-Jun-19 |
| Reliance FHF-XXIX-18-1246D | 21.88 | 9.45 | 06-Jan-16 | 5-Jun-19 |
| Reliance FHF-XXX-18-1131D | 5.24 | 6.93 | 30-Apr-16 | 5-Jun-19 |
| Reliance FHF-XXX-3-1223D | 11.73 | 12.90 | 03-Feb-16 | 10-Jun-19 |
| Reliance FHF-XXX-20-1100D | 8.20 | 5.95 | 06-Jun-16 | 11-Jun-19 |
| HDFC FMP-XXXVI-1153D-April 2016(1) |
6.80 | 7.05 | 05-May-16 | 25-Jun-19 |
| HDFC FMP-XXXVI-1190D-March 2016(1) |
43.13 | 6.78 | 23-Mar-16 | 25-Jun-19 |
| HDFC FMP-XXXVI-1127D-May 2016(1) |
1.35 | 1.11 | 31-May-16 | 2-Jul-19 |
| Reliance FHF-XXXI-4-1100D | 0.82 | 1.42 | 30-Jun-16 | 5-Jul-19 |
| HDFC FMP-XXXVII-1111D-Sep 2016(1) |
2.69 | 5.19 | 15-Sep-16 | 1-Oct-19 |
Data as on March 31, 2019 | Source: ACE MF, PL Research
Know the risks
Fixed Maturity Plans or FMPs, are close-ended debt mutual fund schemes. These schemes hold debt securities with an average maturity that matches the lock-in period of the scheme. As a result, such schemes don’t face any interest rate risks at maturity. Since they lock-in the yield at the time of investment and stay invested till maturity, the intermittent market fluctuations do not impact their maturity proceeds.
FMPs are tax-efficient as well, given the indexation benefit. Given this, FMPs are touted as a good alternative to bank fixed deposits.
However, FMPs are not free from credit risk. If the security is downgraded to junk status or if issuer defaults on the repayment, investors will suffer a sharp cut in their investment value.
Therefore, when it comes to investing in FMPs, it is important to check the tentative credit allocation before investing. Doing this will avoid redemption shocks at maturity.
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