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End Of A Safe Haven

End Of A Safe Haven

Stress in indebted companies is spilling to debt mutual funds.

Illustration by Raj Verma Illustration by Raj Verma

Debt mutual funds have traditionally been a safe haven for risk-averse investors, but that seems to be changing now.

In April, Kotak Mahindra Asset Management delayed the redemption of six of its fixed maturity plans (FMPs) while HDFC Mutual Fund also announced rolling over one of its FMPs because of exposure to the highly leveraged Essel group.

With this, the financial stress in debt-laden companies seems to be spilling over to debt mutual funds. Just like Essel, which owns Zee, there could be other instances brewing as many promoters, starved of bank credit, have pledged their shareholding with mutual funds to raise money.

With corporate profits contracting at an annualised rate of 1.8 per cent between FY14 and FY18, the leverage levels in companies have gone up. In case of default, lenders sell pledged shares and the scrip value nosedives. For Zee, promoter Subhash Chandra has given a personal guarantee to repay debt by September 2019.

As a result, fund managers have postponed redemption as well. While investors will get back money with interest at a later date, the case has more than dented investor confidence in debt funds. It's time investors took a closer look at specific funds to decide the ones that balance their risk appetite with returns, or consider equity investments, which are riskier but also more rewarding.