IL&FS is a perfect example of credit risk in debt mutual funds

Only when the tide goes out do you discover who’s been swimming naked. - Warren Buffett

When those mutual fund ads say ‘Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing’. Here’s where the “read” part assumes importance.

As you may have read the IL&FS group is facing liquidity pressures ( fancy words for inability to repay debt) due to indebtedness. According to FE, Debt Mutual Funds have a combined exposure of Rs 1200 crores to IL&FS debt.

Rating agencies this week and last week initiated a series downgrades on the debt issued by the company. Some of the debt was downgraded to BB, otherwise referred to as non-investment or junk grade.

So when debt held by mutual funds is downgraded below investment grades, SEBI mandates that the “All Non Investment grade performing debt securities is valued at a discount of 25% to the face value.” This means that the NAVs of debt funds holding these securities would fall to the extent of the exposure.

The surprising part in this who saga is that some liquid, money market and ultrashort-term funds funds which are supposed to old the safest of securities were holding IL&FS securities. Which is extremely reckless. Anyways, since the debt was downgraded as lot of schemes reported fall in NAVs yesterday. Some funds wiped out over 3 months of return in a single day. Here are some of the losers yesterday.

Fund YTD return 1 month return % fall on Sep 10
ABSL Medium term plan 4.06 -0.19 -0.26
ABSL Credit risk fund 5.06 0.07 -0.2
Invesco India Short Term Fund 3.49 0.07 -0.11%
Invesco India Credit Risk Fund 3.44 -0.53 -0.85%
DSP BlackRock Money Manager Fund 4.77 0.2 -0.35%
DSP BlackRock Credit Risk Fund 1.97 -1.51 -0.93%
DSP BlackRock Bond Fund 2.81 -0.51 0.60%
Principal Arbitrage Fund 2.86 -0.77 -1.05%
Principal Cash Management Fund 3.81 -0.62 -1.21%
Principal Low Duration Fund 4.85 0.32 -0.14%
Principal Ultra Short Term Fund 4.3 -0.46 -0.99%
BOI AXA Credit Risk Fund 2.68 -1.38 -1.85%

What should you as an investor do?
Nobody invests in liquid and short term funds for their returns. People park money here to at least get some return vs nothing or more than SB. In this scenario safety is the highest priority. Read the scheme document to ensure that the fund invest in safe AAA investing.

Factsheets show the holdings and the credit ratings like. This is the factsheet of Principal Cash Management Fund. Ironically this is the objective of the fund

“To provide investors with as high a level of income available from short-term investments as is considered consistent with preservation of capital and maintenance of liquidity, by investing in a portfolio of money market and investment grade debt instruments.”


Best stick with funds that invest in the highest rated securities.

Visualizing this.

can you mention all the mutual fund schemes affected or has exposure to this IL&FS?

Also which is the reliable website to find each mutual fund’s fact sheet to find out what type of investment they have?


The respective AMCs website.