In equity oriented funds, the fund manager has a chance to pick severely undervalued stocks and reward investors by holding them patiently until their true worth is realised. However, when it comes to debt funds, fund managers have limitations as to how much they can outpace their peers. It is usually expected that, high risk bearing investments should compensate investors with correspondingly high returns. Many investors are aware about the risk element of equity oriented schemes, but when it comes to debt oriented funds, they badly undermine the potential threats.

Quest for high returns makes many fund managers compromise on the creditworthiness of the borrower. This is why the Securities & Exchange Board of India (SEBI) has stepped up vigilance on debt mutual funds amid ratings downgrades of corporate debt papers held by them. Due to a slowdown in the economy, corporate India and the banking sector has been facing pressure of increasing NPA’s. JP Morgan Mutual Fund has been in the news for having exposure to debt issued by Amtek Auto whose rating was suspended by CARE for failure to share crucial information for facilitating a rating opinion.

The fund had an exposure to the tune of Rs. 200 crores. When the company issued debt, it was carrying an 'AA-' by rating agency CARE. Its Brickwork Ratings has been downgraded to 'C', from 'A+' earlier. Creditors have been largely been affected as the company reported a net loss of Rs 157.60 crore in June quarter, while net sales were at Rs 854.22 crore. The total debt on the balance sheet of the company was Rs 7,844.12 crore, As of March this year.

Following Amtek Auto, Jindal Steel and Power Ltd (JSPL) has also undergone a ratings downgrade by ICRA recently, which has moved JSPL to 'negative outlook', due to its elevated debt levels. As on June 30, the company had consolidated debt of Rs 45,312 crore with Franklin Templeton and some other top mutual funds having an exposure of more than Rs 4,500 crore to Jindal Steel's debt securities according to the economic times (September 14, 2015 issue).

SEBI has asked for the data from mutual funds on their exposure to Jindal Steel & Power (JSPL). Following the Amtek Auto and JSPL downgrade SEBI has followed suit by increasing vigilance on Debt mutual funds by asking them to disclose their exposure to securities whose ratings have been downgraded and those being referred to the CDR cell.

Mutual funds are under the scanner as increasing number of funds are taking up risky investments in search of higher yields. SEBI has also been perturbed as funds have failed to make adequate disclosures about their debt exposure to investors.

Some companies also did not make proper disclosures to stock exchanges even as their credit ratings were downgraded while mutual funds absconded from revealing information about companies financial woes even though some of their credit ratings were downgraded.

On hearing about these ratings downgrades investors have pulled money out of a few debt schemes. Fundamentally, companies in India are still recovering from a slowdown in the economy and growth is yet to pick up.

PersonalFN believes, when you invest in debt funds, you should care more about the safety measures undertaken by the fund. Please keep in mind, debt funds are not risk free. You should ideally keep away from the funds that invest in debt securities of inferior quality.

Along with returns generated by the fund, quality of its holdings and quality of fund management should be assessed before investing in it.

In case you don’t know which debt funds you should invest in; you may like to know more about Debt Select, an unbiased service of PersonalFN that helps you find out promising debt funds.

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