Debt MF plans with YES Bank papers to see NAV erosion

Mutual fund investors will likely see the net asset values (NAVs) of their investments drop in schemes that hold Yes Bank’s debt after the central bank imposed operational curbs, capping withdrawals to prevent a run on the stressed lender.

As per data from Rupeevest, 32 mutual fund schemes cumulatively hold debt worth Rs 2,848 crore in Yes Bank as of January 2020.

The largest holder, Nippon India Mutual Fund, has six schemes that cumulatively hold paper worth Rs 1,806 crore. In addition to this, four schemes of Franklin Templeton cumulatively hold paper worth Rs 475 crore, and six schemes of UTI MF hold paper worth Rs 365 crore.

The largest exposure of Rs 637.8 crore is in Nippon India Equity Hybrid Fund, which accounts for 8.11% of its portfolio, and that caused the NAV to slip 9.48%, Nippon India Credit Risk Fund, at Rs 540.1 crore with 10.96% of its assets, saw its NAV fall 11.91%, and Nippon India Strategic Debt Fund, at Rs 436.3 crore accounting for 21.25% of its assets, saw its NAV dip 25.24%.

While Nippon India Mutual Fund has marked the investments down to zero, others like Franklin Templeton and UTI MF have marked it in line with the guidance from valuation agencies.

In a note to investors, Nippon India Mutual Fund said it has marked the perpetual bonds of Yes Bank in the schemes to zero and fresh inflows in the scheme have been limited to Rs 2 lakh per day per scheme per investor, until further notice.

Franklin Templeton said: “Franklin Templeton has marked to market its exposure to Yes Bank bonds (AT-1 bonds and tier I Basel II bonds) in line with guidance from valuation agencies i.e. at 47.5% of face value.”

The fund house pointed out that Yes Bank had on January 30, 2020, exercised the call option on 10.25% tier I Basel II bonds, subject to Reserve Bank of India (RBI) approval. However, on the call option date (March 5, 2020), Yes Bank decided to not exercise the call option. Further, the bank has not paid interest on the bonds for the period ending March 5, 2020.

A spokesperson for UTI MF said, “UTI is valuing its securities at a price given by the valuation agencies as per Sebi regulations.”

Financial planners believe investors should take a call on the remainder of their portfolios.

“A large portion of the impact of the Yes Bank paper is already factored in the NAVs. Investors in these schemes should look at other holdings in the portfolios and if they are comfortable, stay invested in the scheme,” said Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. He points out that investors should also consider exit loads and tax implications before taking a decision.

UTI Mutual Fund, Nippon India Mutual Fund and Baroda MF will segregate debt securities of Yes Bank effective from March 6, 2020, following the rating falling below investment grade to D.

Domestic rating agency Icra on Friday downgraded Yes Bank’s bonds worth Rs 52,612 crore.