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Debt mutual funds losing ground as NBFC stress hits segment

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The great Indian middle class is on a perennial hunt for savings instruments that yield a bit more than bank deposits and are tax efficient. Debt mutual funds, which seemed to have met this need earlier, are losing ground rather quickly after the NBFCstress lately caused scheme values to plunge.

Hence, the new government must strive to provide safe and stable investment options for the middle class that accounts for the majority of India’s household savings. Data from the Association of Mutual Funds in India (Amfi) showed that the share of debt schemes in the total mutual fund resources has shrunk to 29% in April 2019 from 35% a year ago.

“If the matter (of liquidity constraints) is not resolved on an urgent basis, it can lead to trust deficit and will take a very long time to rebuild lost confidence,” said Vikram Dalal, managing director, Synergee Capital Services. “Over the past two decades, debt funds were considered a good alternative to fixed deposits of banks/post offices/NBFCs and corporates.”

Since the default by some IL&FS group companies in September last year, there have been a spate of rating downgrades. CARE Ratings has downgraded Reliance Capital by some notches, while it has put PNB Housing Finance on a rating watch, with developing implications. Last November, ICRA Ratings and Moody’s Investors Service downgraded YES Bank on corporate governance concerns.

CARE Ratings have cut the creditworthiness of four companies by multiple notches since September. These are Reliance Home Finance, Reliance Commercial Credit, Dewan Housing Finance, and Rattan India Finance. Last week, it downgraded Reliance Capital, to triple-BBB from A grade. “Some of our clients are expressing concerns over debt mutual fund schemes as the latest bond defaults or repayment delays have crimped fund returns,” said Anil Chopra, group director at Bajaj Capital. “Investors will now look for higher safety for their debt investments, where bank fixed deposits could turn out to be their first choice.” Debt fund is an investment pool, such as a mutual fund or exchange-traded fund, that invest in fixed income securities for a secured return.
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“Thus, investors were investing with a lot of trust and faith. There was no doubt on credit risk or on the ability of any debt fund manager,” Dalal said. The investor class included retail, HNI, ultra-HNI and corporates. Retail investors, meanwhile, bought these units in systematic investment plans.

“Stricter regulation for NBFCs could bring back investor confidence into such securities,” Chopra of Bajaj Capital said.

[“source=economictimes.indiatimes”]

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