While the portfolio credit quality of most Indian mutual fund (MF) schemes is strong, a majority of the schemes have single industry or company concentration, says a latest release from ratings agency Crisil.
Funds with large and illiquid single company exposures could be affected by redemption pressures. The single company exposures of these funds could increase as they sell more liquid assets to meet redemptions. The high credit quality of most debt funds’ investments partly offsets the risk arising from concentrated holdings, the release said.
Crisil defines portfolios with more than 25 per cent of assets under management (AUM) in a single company or industry as “significantly exposed”.
The agency conducted a study where they analysed 860 schemes, which covered 96 per cent of AUM of debt mutual funds.
The study revealed that investments that are rated AAA and P1+, the highest rating categories, constituted 82 per cent of the portfolios analysed. The AA category adds another 6 per cent to this figure.
Roopa Kudva, managing director & chief executive officer, Crisil, said, “Most debt funds have not compromised on credit quality in search of returns. Investors, therefore, have little reason to fear defaults eroding the value of their investments. Nevertheless, lack of adequate portfolio diversification remains an issue.”
Half of the schemes have significant exposure to the banking sector and 38 per cent have a significant exposure to non-banking finance companies (NBFCs) . Exposure to the real estate sector is only 5 per cent of debt funds AUMs. More importantly, not more than 3 per cent of debt mutual funds have significant exposure to the real estate sector.
Of the 58 debt schemes that have AUMs of Rs 1,000 crore and above, only two are significantly exposed to single companies.
Of the remaining 802 schemes in the study, 249 have significant exposure to at least one company. This indicates that while larger schemes are well-diversified as far as single-company exposure is concerned, 30 per cent of the smaller schemes have significant single-company exposure.
These concentration levels reflect the limited investment opportunities in the Indian debt market. “Over the years, banks and NBFCs have largely been the issuers. Manufacturing companies have preferred to raise funds abroad because it was cheaper there and also it was more difficult in India procedurally.
However, the procedure to raise funds in India through issuances has eased considerably. The liquidity crisis globally has also led to more manufacturing companies coming to the Indian market to raise funds. The issuer base is thus widening,” said Kudva.
