MUMBAI: Some of the investors in debt mutual funds are likely to witness losses in their portfolio on Tuesday as a result of ratings downgrades of two Anil Ambani-controlled companies — Reliance Home Finance to D (default category), and Reliance Commercial Finance to C (junk category).
Although Reliance Capital, the holding company for the two Reliance group entities, issued a release saying it still maintains an ‘A’ rating, indicating a relatively high degree of safety, investors in debt mutual funds are jittery, financial planners said. A series of downgrades of highly rated papers in the last few months, all of which were held by leading fund houses, have led to a feeling of insecurity among mutual fund investors, they added.
Since September last year, debt troubles and defaults by highly rated companies — which included government run IL&FS, private sector home finance firm DHFL, and companies belonging to Zee group — have hit debt fund investors through the reduced value of their investments and delayed payments. The ratings downgrade in the Reliance group companies is the fourth such instance in less than a year.
According to industry estimates and data from MF research houses, Reliance Mutual Fund’s total exposure in these two companies is the highest (see graphic).
According to Sebi rules, these funds have to ‘mark down’ their investments in the debt papers issued by these companies, meaning reduce the value of such investments. For example, if a fund house decides to mark down an investment worth Rs 100 by 50%, it will now be valued at Rs 50. After the mark-down, the fund manager would expect these companies to honour the full value of the bonds over the next few months. If case of no payments by the companies, the full value will have to be written off.
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According to Manoj Nagpal, a leading financial adviser, the MF industry has a total exposure of Rs 2,500-2,700 crore to these two companies. If the fund houses go for a mark-down, the fall in NAV (net asset value) for investors will depend upon the extent of the mark-down. However, since Reliance group companies are assuring sale of assets to get money, the funds are expected to get their own back, but with a delay. Also, low holding levels of funds in these companies will limit the extent of losses to investors, Nagpal said on a Twitter post.
