The highlight of these instructions, safety first, is a principle we all follow in our day-to-day life. Right from wearing a seatbelt while driving a car to flying in an aircraft, or switching the regulator of the gas cylinder off before one goes to sleep.

So why is it that when it comes to money many of us become careless?

Pertinently, what if such carelessness is demonstrated by professionals who are hired to manage your money, along with an element of safety?

The recent IL&FS episode is another example of the carelessness fund managers deploy when they put the safety of investor’s money at stake.

Well I am not talking about debt mutual funds here, as they are risky in nature.

But, what about liquid funds? Aren’t they meant to be safe in the first place and offer liquidity to investors?

Liquid funds are supposed to be an ideal alternative to one’s savings bank account. That’s the reason their primary objective is to keep your money safe and offer daily liquidity.

Remember, returns come secondary. But many fund managers seem to be neglecting the rule and aim for a higher yield on liquid funds instead. Primarily, it’s a race to attract more investors with the higher returns on liquid funds.

Obviously, more AUM means more money and revenue to the asset management company, which takes care of the salaries and incentives of their CEO’s and fund managers too.

When mutual fund managers fail to do their homework and end up investing in debt securities issued by unreliable companies, thousands of investors suffer.

Recently, the Net Asset Values (NAVs) of several liquid and debt funds took a hit in the range of 0.5% to 8%. The losses these incurred were effectively within a span of few days. Few liquid funds had to mark down their investments in Infrastructure Leasing & Financial Services (IL&FS) and its group companies owing to sudden credit rating downgrades.

Notably, debt securities issued by IL&FS and its group companies were rated top notch by top rating agencies like ICRA and CARE until last month. On September 10, 2018, ICRA downgraded non-convertible debentures of IL&FS Financial Services to ‘BB’ from ‘AA+’. It also downgraded the short-term commercial paper of the company to 'A4' from 'A1+'.

Securities issued by its other group companies too have been further downgraded to below investment grade. The downgrades follow the companies defaulting on interest payments on their bonds.

Table 1: To what extent are the liquid and debt funds relying on the unreliable IL&FS

Scheme Name	Category	Asset Type	Company Name	Rating as of Aug 2018	Value (Rs in Cr.)	% of Assets
Aditya Birla SL Credit Risk Fund	Credit Risk Funds	Corporate Debt	IL&FS Education & Technology Services Ltd.	AA-(SO)	19.67	0.24
			IL&FS Tamil Nadu Power Company Ltd.	A+(SO)	170.02	2.04
Aditya Birla SL Medium Term Plan	Medium duration Funds	Corporate Debt	IL&FS Education & Technology Services Ltd.	AA-(SO)	110.80	0.97
			IL&FS Tamil Nadu Power Company Ltd.	A+(SO)	237.54	2.07
BOI AXA Credit Risk Fund	Credit Risk Funds	Commercial Paper	Infrastructure Leasing & Financial Services Ltd.	A1+	103.60	6.13
DSP Bond Fund	Medium duration Funds	Corporate Debt	IL&FS Transportation Networks Ltd.	AA+(SO)	12.52	1.89
DSP Credit Risk Fund	Credit Risk Funds	Corporate Debt	IL&FS Energy Development Co. Ltd.	A+	224.29	3.26
			IL&FS Transportation Networks Ltd.	AA+(SO)	220.92	3.21
DSP Equity & Bond Fund	Aggressive Hybrid Funds	Corporate Debt	IL&FS Transportation Networks Ltd.	AA+(SO)	56.32	0.77
DSP FMP 195-36M	Fixed Maturity Plans	Corporate Debt	IL&FS Transportation Networks Ltd.	AA+(SO)	5.63	9.94
DSP FMP 196-37M	Fixed Maturity Plans	Corporate Debt	IL&FS Energy Development Co. Ltd.	A+	29.00	10.02
DSP Regular Savings Fund	Conservative Hybrid Funds	Corporate Debt	IL&FS Transportation Networks Ltd.	AA+(SO)	17.52	4.61
DSP Ultra Short Fund	Ultra Short Duration Funds	Corporate Debt	IL&FS Transportation Networks Ltd.	AA+(SO)	62.58	1.48
HSBC Cash Fund	Liquid Funds	Commercial Paper	IL&FS Financial Services Ltd.	A1+	104.91	1.40
Invesco India Credit Risk Fund	Credit Risk Funds	Corporate Debt	IL&FS Transportation Networks Ltd.	AA+(SO)	31.18	7.73
Kotak FMP-183-1204D	Fixed Maturity Plans	Corporate Debt	IL&FS Transportation Networks Ltd.	AA+(SO)	42.56	7.36
Kotak FMP-192-1100D	Fixed Maturity Plans	Corporate Debt	IL&FS Transportation Networks Ltd.	AA+(SO)	7.51	3.14
Kotak FMP-193-1098D	Fixed Maturity Plans	Corporate Debt	IL&FS Transportation Networks Ltd.	AA+(SO)	12.52	5.01
Kotak FMP-194-1099D	Fixed Maturity Plans	Corporate Debt	IL&FS Transportation Networks Ltd.	AA+(SO)	18.77	8.52
LIC MF Liquid	Liquid Funds	Commercial Paper	IL&FS Financial Services Ltd.	A1+	199.20	1.20
			IL&FS Securities Services Ltd.	A1+	497.68	2.99
Mirae Asset Cash Management	Liquid Funds	Commercial Paper	IL&FS Securities Services Ltd.	A1+	49.89	2.00
Motilal Oswal Ultra Short Term Fund	Ultra Short Duration Funds	Commercial Paper	Infrastructure Leasing & Financial Services Ltd.	A1+	98.24	9.87
Principal Cash Management Fund	Liquid Funds	Commercial Paper	IL&FS Financial Services Ltd.	A1+	102.08	9.81
Principal Low Duration Fund	Low Duration Funds	Commercial Paper	IL&FS Financial Services Ltd.	A1+	2.98	0.57
Principal Ultra Short Term Fund	Ultra Short Duration Funds	Commercial Paper	IL&FS Financial Services Ltd.	A1+	8.96	7.59
Tata Corp Bond Fund	Corporate Bond Funds	Corporate Debt	IL&FS Financial Services Ltd.	AA+	24.68	4.60
Tata Money Market Fund	Money Market Funds	Commercial Paper	Infrastructure Leasing & Financial Services	A1+	49.33	2.33
Tata ST Bond Fund	Short Duration Funds	Commercial Paper	Infrastructure Leasing & Financial Services Ltd.	A1+	166.94	3.17
Union Liquid Fund	Liquid Funds	Commercial Paper	IL&FS Securities Services Ltd.	A1+	49.61	1.99
			Infrastructure Leasing & Financial Services Ltd.	A1+	49.84	2.00

Portfolio holdings as of August 31, 2018
(Source: ACEMF)

As seen in table 1, about 26 mutual fund schemes collectively had an exposure of about Rs 2,790 crore into bond instruments issued by IL&FS and its group companies, as on August 31, 2018. Of these…

• Liquid funds held an exposure of around Rs 1,053.2 crore

• Credit Risk Funds held Rs 769.7 crore

• Medium Duration Funds held Rs 360.9 crore

• Ultra Short Duration Funds had about Rs 169.8 crore

• Short Duration Funds held Rs 166.9 crore

• Fixed Maturity Plans (FMPs), had around Rs 116 crore

• Hybrid Funds held about Rs 74 crore

• Corporate Bond Funds had an exposure of Rs 24.7 crore

• Money Market Funds held Rs 49.3 crore, and

• Low Duration Funds carried instruments worth Rs 3 crore, in their portfolio.

Each of the 26 schemes easily held about 1.5% to as much as 10% weightage to debt instruments issued by IL&FS group. While LIC Mutual Fund, Aditya Birla SL Mutual Fund, and DSP Mutual Fund were the major holders of the IL&FS group securities, it was Principal and Motilal Oswal Mutual Fund that were severely impacted. The liquid and ultra-short duration funds such as Principal Cash Management Fund, Principal Ultra-Short Term Debt Fund, Motilal Oswal Ultra Short Term Fund and FMP's held by DSP and Kotak had about 8%-10% of their assets in instruments of IL&FS group companies.

Few other schemes like Invesco India Credit Risk Fund (7.73%), BOI AXA Credit Risk Fund (6.13%), Tata Corp Bond Fund (4.6%), LICMF Liquid (4.19%), DSP Credit Risk Fund (6.47%), DSP Regular Savings Fund (4.61%), Aditya Birla SL Credit Risk Fund (2.28%), Union Liquid Fund (3.99%), Tata ST Bond Fund (3.17%), and Aditya Birla SL Medium Term Plan (3.04%) carried significant weightage in securities issued by IL&FS group companies.

Now here’s something to consider…

What would happen to one’s investment if the fund were to write-off such a large exposure to these instruments?

Table 2: IL&FS is bleeding and so are liquid and debt funds

Scheme Name	Category	Month Till Date	1 Day Change in NAV on 10/Sep/18	1 Day Change in NAV on 17/Sep/18	1 Day Change in NAV on 24/Sep/18	1 Year
HSBC Cash Fund	Liquid	0.50	0.02	0.02	0.02	7.12
LIC MF Liquid	Liquid	0.49	0.02	0.02	0.02	7.04
Mirae Asset Cash Management	Liquid	0.50	0.02	0.02	0.02	7.07
Principal Cash Management Fund	Liquid	-7.95	-1.21	-1.60	-5.72	-1.85
Union Liquid Fund	Liquid	-2.92	0.02	0.02	0.02	3.41
DSP Ultra Short Fund	Ultra Short Duration	-0.53	-0.35	-0.35	0.01	5.33
Motilal Oswal Ultra Short Term Fund	Ultra Short Duration	-6.12	-1.86	0.05	-0.01	-0.94
Principal Ultra Short Term Fund	Ultra Short Duration	-5.24	-1.00	-1.01	-3.45	0.54
Principal Low Duration Fund	Low Duration	-0.75	-0.14	-0.11	-0.37	5.35
Tata Money Market Fund	Money Market	-1.33	-0.55	0.06	0.04	5.36
Tata ST Bond Fund	Short Duration	-2.91	-0.90	0.02	-0.15	0.88
Tata Corp Bond Fund	Corporate Bond	-2.53	-1.20	0.00	-0.09	2.68
Aditya Birla SL Credit Risk Fund	Credit Risk Fund	-0.60	-0.21	-0.02	-0.09	4.85
BOI AXA Credit Risk Fund	Credit Risk Fund	-1.90	-0.11	-1.48	-0.14	5.00
DSP Credit Risk Fund	Credit Risk Fund	-2.77	-0.94	-0.82	-0.10	1.33
Invesco India Credit Risk Fund	Credit Risk Fund	-2.33	-0.86	-1.16	-0.08	2.43
Aditya Birla SL Medium Term Plan	Medium Duration	-0.81	-0.26	0.02	-0.14	3.94
DSP Bond Fund	Medium Duration	-1.31	-0.60	-0.44	-0.13	2.56
DSP FMP 195-36M	Fixed Maturity Plans	-4.75	-2.48	-2.49	-0.03	1.58
DSP FMP 196-37M	Fixed Maturity Plans	-2.41	-0.02	0.05	-0.05	4.22
Kotak FMP-183-1204D	Fixed Maturity Plans	-1.59	-1.84	0.06	0.00	5.44
Kotak FMP-192-1100D	Fixed Maturity Plans	-0.51	-0.78	0.06	-0.01	6.93
Kotak FMP-193-1098D	Fixed Maturity Plans	-1.20	-1.27	0.04	-0.02	4.67
Kotak FMP-194-1099D	Fixed Maturity Plans	-2.07	-2.15	0.04	-0.02	3.87
DSP Equity & Bond Fund	Aggressive Hybrid	-7.67	-1.59	-0.97	-1.47	1.91
DSP Regular Savings Fund	Conservative Hybrid	-5.19	-1.75	-1.46	-0.79	-1.82

Month Till Date and 1 Year performance calculated as on September 26, 2018
(Source: ACEMF)

Any write-off in the value of a security that liquid and debt mutual funds hold can lead to a negative return. That’s the reason most of the schemes holding exposure to IL&FS group companies are currently bleeding red.

The NAV of Principal Cash Management Fund, Motilal Oswal Ultra-Short Term Fund, and Principal Ultra Short Term Fund are down 7.95%, 6.12%, and 5.24% respectively, this month.

Other schemes like Union Liquid Fund (-2.92%), DSP Credit Risk Fund (-2.77%), Invesco India Credit Risk Fund (-2.33%), Tata ST Bond Fund (2.91%), Tata Corp Bond Fund (-2.53%), BOI AXA Credit Risk Fund (-1.9%), Tata Money Market Fund (-1.33), and DSP Bond Fund (-1.31%) are down more than 1% this month. While the FMPs carrying exposure to IL&FS are down upto 5%, the hybrid funds too are down by about 5% to 8% this month (the correction in equity markets too had an impact on the performance on hybrid funds).

Do fund managers really care about the interest of investors?

I wonder if fund managers really learn from their past mistakes. Well, this is not the first time that mutual fund managers have taken thoughtless investment decisions and relied solely on the ratings provided by rating agencies.

Isn’t it the duty of the fund management to follow an internal risk assessment process and proper due diligence before committing money to such risky securities?

Earlier too, mutual funds have lost investor money in entities like Amtek Auto and Jindal Steel & Power Ltd (JSPL).

In September 2015, Amtek Auto had defaulted on the Rs 800 crore worth of bonds, which adversely impacted JPMorgan Mutual Fund. In fact, it had to even restrict withdrawals from two of its funds because of the Amtek bond ownership. The fund house later sold the Amtek Auto papers to a private equity firm at a 15% loss.

Similarly, Jindal Steel & Power Ltd (JSPL) too had defaulted on interest repayments to its bonds holders, due in September 2016. In this case, Crisil first cut its ratings on JSPL securities to junk category before further downgrading it to default. Franklin Templeton Mutual Fund, the biggest holder of the company's bonds had to dump its holdings worth Rs 1,000 crore in JSPL at a steeper discount. ICICI Prudential Mutual Fund was the second-highest holder of JSPL bonds worth almost Rs 500 crore.

In another case, in the month of February 2017, investors in debt schemes of Taurus Mutual Fund borne the brunt of credit rating downgrades and lost about 12% in a day. The NAV of Taurus Mutual Fund's fixed income schemes fell 7%-12% when Ballarpur Industries defaulted on the repayment of its commercial paper maturity proceeds and the fund house didn’t get paid about Rs. 107 crore for the CPs held in its schemes. India Ratings and Research (Ind-Ra) downgraded its credit ratings on Ballarpur Industries, to the lowest grade. This forced the fund house to write down the entire investment in Ballarpur and stop fresh inflows into the affected schemes. However, in July 2017 Ballarpur “made arrangements” to pay Taurus Rs. 30.65 crore or almost 29% of its defaulted debt. This recovered money was allocated to all the affected debt funds and investors, who owned the fund on the day of default (including those who had sold because the NAV fell), received a part of the recovery proceeds.

Is your money in liquid funds really safe?

To answer this, let’s take a look at the type of instruments held by liquid funds.

Table 3: Should liquid funds still bet on corporates?

Instrument Type	Corpus (Rs in Cr.)	% of Total Liquid Fund Corpus
Commercial Paper	393,088	68.89
Certificate of Deposit	64,566	11.32
Treasury Bills	57,125	10.01
Deposits	22,182	3.89
Cash & Cash Equivalents and Net Assets	16,703	2.93
Corporate Debt	10,854	1.90
Bills Rediscounting	2,537	0.44
Cash Management Bill	1,784	0.31
Deposits (Placed as Margin)	1,121	0.20
Government Securities	460	0.08
PTC & Securitized Debt	156	0.03
Total Liquid Fund Corpus (Rs in Cr.)	570,577	100

Portfolio data as on August 31, 2018
(Source: ACEMF)

The table 3 shows, the allocation of the total corpus of Rs 5,70,577 crore together held by 41 liquid funds, as of August 31, 2018. Surprisingly, of this, about Rs 3,93,088 crore worth of assets are in commercial papers and about Rs 10,854 crore in Corporate Debt instruments. That’s about 70.8% of the total assets in liquid funds. Notably only about 10% of the commercial papers held by liquid funds belong to Public Sector Banks, while 54% belong to NBFCs, which isn’t safe either. The remaining 36% of the commercial papers held by liquid funds belong to corporate entities operating in other sectors. Liquid fund managers are clearly risking investor’s money by betting on instruments issued by corporates, for higher yield.

As an investor, these are crucial questions to look into:

• Are the fund managers holding exposure to these corporate instruments confident about its quality?

• Have they done their internal risk assessment diligently?

• How reliable are the ratings assigned to these instruments by rating agencies?

• What if some other NBFC or a corporate group defaults tomorrow?

In this case, the Commercial Papers issued by IL&FS Financial Services were rated A1+ by ICRA; and so, they were considered to be high quality. Unfortunately, ICRA degraded the instruments by four notches to A4 only after IL&FS as a group failed on its commitment, least expected from a group backed by institutions like SBI and LIC.

So shouldn’t even the rating agencies be held accountable for the mess they have created, by giving top rating in the first place, which is unreliable?

We consider this to be a systematic failure and expect regulators like the SEBI and RBI to take corrective measures so that the hard-earned money of small investors is not at risk in future.

Even fund houses need to have proper due diligence and internal risk assessment policies in place to avoid taking exposure in such groups and must not rely completely on ratings provided by rating agencies.

So can we expect the regulator to act strictly this time and come up with some stringent guidelines for mutual funds to protect the interest of investors who invest in liquid funds for safety?

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Comments
naveen_shabnam70@rediffmail.com Apr 19, 2019 Very educative. An eye opener.
devinilima@yahoo.co.in Mar 06, 2019 The NAV of my investment in Principal and Motilal debt funds has gone down miserably. If I hold on to the units, is there any possibility of recovery from ILFS, . If it is possible I can atleast recover some loss. Can you please advice?
indiafunds@gmail.com Mar 10, 2019 Appreciate your knowledge sharing, ordinary persons assume mutual funds are safe ,cause they are managed by highly qualified, smart experienced fund managers. Trouble seems to be with rating agencies .Always ,after death.we ask why he died(it will not bring back a dead person).

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