In March 2020, Debt Mutual Funds (MFs) saw their second largest outflow 1.94 trillion due to liquidity concerns posed by Covid-19. It’s been a turning point ever since. Between April 2020 and November 2021, the industry saw so much 3.29 trillion net inflow. This means that with the mark-to-market gains of the underlying assets, debt mutual fund portfolios have seen record growth. 14.74 trillion in August 2021. they closed on november 14.52 trillion. This sharp recovery in assets is also supported by the improvement in the portfolio profile of debt MFs.
We looked at three key components of a portfolio of open-ended debt mutual fund portfolios: credit rating structure, liquidity of securities, and sensitive-sector risk. The final component was based on CRISIL Research’s Industry Risk Score.
Rating Profile: The industry’s overall investment in top-rated paper, government securities (G-Secs) and state development loans (SDLs) has grown by 700 basis points (bps) from 87 per cent in October 2021 amid liquidity. crisis in 2020
Issuers with negative rating outlook in debt MF portfolio declined to less than 1% in October 2021 from a high of ~7% in April 2020, showing a significant improvement in the overall rating profile of invested funds.
There has been a significant improvement in the rating profiles of all categories. Medium-term, dynamic bonds and ultra-short funds with notable exposure to lower-rated papers—at 49%, 33% and 31%, respectively—in March 2020 saw those respective numbers fall to 35%, 13% and 9%. have seen. until October 2021.
Liquidity Profile: At the peak of the crisis in March 2020, the industry exposure to liquid issuers was approximately 72%; This increased to 82% by October 2021.
The profile of liquid issuers remained skewed towards G-Sec, SDL and AAA-rated papers, with their stake increasing to nearly 99% from 97% in March 2020.
Almost all loan categories saw an improvement in their liquidity profile. Credit-risk and medium-term funds reduced their exposure to illiquid issues to 38% and 22% in October 2021, from 58% and 35%, respectively, as of March 2020.
Exposure to Sensitive Sectors: Industry exposure to CRISIL-defined sensitive sectors has declined, with total asset exposure minimised. 30,000 crore (2%) category assets, as of October 2021 58,000 crore (6%) as of April 2020
As credit-risk funds and medium-term funds saw the sharpest declines of 9% and 8%, respectively, from 27% and 23% in October 2021, as of March 2020, exposure to sensitive sectors also declined.
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A possible third wave of the COVID-19 pandemic poses significant near-term risks to this credit outlook. Any rapid withdrawal of incentives by global governments and regulators would also be a major downside risk in the medium term and could impact credit profiles. This, in turn, will affect the mutual fund portfolio. It is important to look at debt funds through multiple lenses and not be judged by a single parameter before making their investment decisions. A proper review/monitoring mechanism should be prioritized in their investment plan to help them avoid the risk associated with wrong choices.
Jiju Vidyadharan, Senior Director, Funds and Fixed Income Research, CRISIL.
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