Is your debt mutual fund exposed to high credit risk?
Aug 31, 2015

Impact

Recently, JPMorgan India Short Term Income Fund and JPMorgan India Treasury Fund bore the brunt of its corporate debt holding in Amtek Auto Ltd.

Amtek Auto Ltd, is sailing through turbulent times. The company reported a net loss of Rs 157.60 crore in June quarter, while net sales were at Rs 854.22 crore. As of March this year, the total debt on the balance sheet of the company was Rs 7,844.12 crore and creditors have been largely been affected. When the company issued this debt paper, it was carrying an 'AA-' by rating agency CARE. But now for failure to share crucial information for facilitating a rating opinion, CARE has suspended the coverage of this company. Brickwork Ratings too has downgraded its rating to 'C', from 'A+' earlier.

Such a scenario has gone on to impact the performance of the aforesaid two schemes, as JPMorgan Mutual Fund was forced to Mark-to-Market the value of the fund in line with the new credit rating.

Amid such times, the Securities & Exchange Board of India (SEBI) has warned the mutual fund industry against randomly investing in corporate bonds and securities which could backfire later and leave small investors in a heave. The capital market regulator has escalated its vigil by intensifying checks on the quality of corporate debt portfolio of fund houses on concern of rise in chance of default in stressed companies. A fact remains that banks are saddled with high Non-Performing Assets (NPAs) and so are companies with huge debt as economic growth continues to flag.

In 2008 too, soon after Lehman Brothers bankruptcy (led by the U.S. sub-prime mortgage crisis), asset quality of mutual funds had come under scrutiny. Although the severity of the problem faced is nowhere close to then; there is a possibility that debt mutual fund scheme with low quality debt papers may face redemption pressures, especially where tenor of some low quality debt papers is rather long.

Thankfully the tenor of Amtek Auto Ltd. is coming to an end on September 20, 2015 and it is expected of JPMorgan Mutual Fund to act prudently in the interest of investors and not chase high yielding debt papers by compromising on the quality of the portfolio. In the aforesaid two schemes, JPMorgan Mutual Fund has a exposure to the tune of Rs 200 crore (or 20.7% of the portfolio) held in form of corporate debt. Other fund houses such as HDFC Mutual Fund, ICICI Mutual Fund, IDFC Mutual Fund, JM Mutual Fund, Kotak Mutual Fund, L&T Mutual Fund, Religare Mutual Fund and UTI Mutual Fund have been holding shares Amtek Auto Ltd. in their portfolio.

PersonalFN is of the view that before you invest your hard earned money, it is vital that you check the portfolio characteristics of a fund. In order to clock a better rate of return some mutual fund houses incline their portfolio to low quality debt papers and shares; but that goes on to compromise on the long term well-being of your investment portfolio. While you invest in mutual funds it is imperative that you select mutual funds prudently and opt for funds which follow strong investment processes and systems.

About the Company including business activity

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989.

QIS was promoted by Mr. Ajit Dayal with an objective of providing value-based information / views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

'PersonalFN' is a service brand of QIS and was started in the year 1999. In 1999, the Company registered the Domain name www.personalfn.com for providing information on mutual funds and personal financial planning, financial markets in general, etc and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services.

Disciplinary history

There are no outstanding litigations against the Company, it subsidiaries and its Directors.

For the terms and condition for research report click here.

Details of associates

1. Money Simplified Services Limited;
2. PersonalFN Insurance Services India Limited ;
3. Equitymaster Agora Research Private Limited;
4. Common Sense Living Private Limited;
5. Quantum Advisors Private Limited;
6. Quantum Asset Management Company Private Limited;
7. HelpYourNGO Private Limited;
8. HelpYourNGO Foundation;
9. QIEF Management LLC, Mauritius
10. Natural Streets for Performing Arts Foundation;
11. Rahul Goel;
12. Ajit Dayal;
13. I V Subramaniam.

Disclosure with regard to ownership and material conflicts of interest
 

1. Neither QIS, it's Associates, Research Analyst or his/her relative have any financial interest in the subject Company , except QIS receives fees for providing research to Quantum Equity Fund of Fund (QEFoF) which is Fund of Fund scheme managed by QMF.
2. Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report.
3. Neither QIS, it's Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS (PersonalFN) is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront /annualized & trail), if any, for any Schemes by QMF to QIS (PersonalFN) is also at arm's length and as per prevailing market practices
    

Disclosure with regard to receipt of Compensation

1. Neither QIS nor it's Associates have any compensation from the subject Company in the past twelve months.
2. Neither QIS nor it's Associates have managed or co-managed public offering of securities for the subject Company in the past twelve months.
3. Neither QIS nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject Company in the past twelve months.
4. Neither QIS nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months, except that QIS had receive fees for services under sponsorship agreement from Franklin Templeton Asset Management India Pvt. Ltd.
5. Neither QIS nor it's Associates have received any compensation or other benefits from the subject Company or third party in connection with the research report
    

General disclosure

1. The Research Analyst has not served as an officer, director or employee of the subject Company.
2. QIS or the Research Analyst has not been engaged in market making activity for the subject Company.
    

Subject Company means Mutual Fund Schemes

Quantum Information Services Pvt. Ltd. 101, Raheja Chambers, 213, Nariman Point, Mumbai - 400021. Tel: +91 22 6136 1200
Website : www.personalfn.com CIN: U65990MH1989PTC054667