Bond Markets have faced severe liquidity crunch since the pandemic crisis has hit the country, particularly in the AA and A rated segment. Franklin MF’s decision to windup their debt funds (actually credit risk funds) added fuel to the fire that triggered outflows from debt funds, mainly Credit Risk Funds which predominantly invests in AA and A rated bonds.
Credit Risk Funds have witnessed huge redemptions over last 3 weeks. The category AUM has come down from over Rs. 81,000 crore a month back to around 30,000 crore as on today. AMCs are having tough time creating liquidity to meet these redemptions. However, few AMCs have smartly switched some of illiquid bonds form Credit Risk Funds to Hybrid Funds. Hybrid Funds by nature invest some amount of their portfolio into bonds. AMCs have used this structure to their benefit and have transferred some low rated and illiquid bonds from Credit Risk Funds to these Hybrid funds.
While there may not be immediate risk of downgrade or default in these bonds, it is not in the right spirit for AMCs to transfer these low rated bonds into Hybrid Funds. Investors never intended to invest in these low rated bonds when they invested in Hybrid Funds.
Investors and distributors should be aware of such moves by these AMCs (particularly A rated Bonds being transferred form Credit risk funds to hybrid funds). They should closely watch the debt portfolio of their Hybrid Funds . Surprisingly, most funds where such securities have been transferred are large sized Hybrid Funds, in fact the 3 largest Hybrid Funds have done most of such transfers. AMCs have used size to their advantage to subsume these risks.
Such transactions within the schemes are called inter-scheme transfers which is a rare practice followed by very few AMCs as it is not in the right spirit. However, given current illiquidity in low rated bonds, AMCs may have been forced to take this unpopular call.
Here are the details of AMCs and their schemes that have undertaken such transactions. ICICI Pru, HDFC and SBI AMC leads in terms of interscheme transfers.
Market Value of bonds transferred from Credit risk funds to Hybrid Funds:
Schemewise details of such inter-scheme transfers:
The above data is based on portfolio changes (in and out) examined in these schemes over last two months. Data based on month end portfolios disclosed on AMC websites.
In coming months investors should watch out their hybrid fund’s debt portfolios carefully, specially of AMCs that have credit risk funds and are facing huge redemptions.