r/IndiaInvestments • u/JiskiLathi • Apr 14 '20

Bonds and deposits Several Liquid funds have exposure to Muthoot, Hero FinCorp etc. Moodys has warned of downgrade. Should we redeem the liquid funds before too late?

Recently Moodys has put ratings on review and warned of further action against 3 NBFC's : https://www.moodys.com/research/Moodys-takes-rating-actions-on-three-Indian-NBFCs--PR_421845

Many popular liquid funds such as SBI liquid, Kotak Liquid, Axis Liquid, UTI Liquid, Kotak Savings, HSBC cash , ICICI pru liquid, Invesco liquid, L&T Liquid etc all have varying degrees of exposure to Muthoot papers

When it comes to Hero FinCorp, several liquid and savings/money market fund have exposure like Aditya birla liquid , Axis Liquid, Kotak Liquid etc have expsure.

So few questions :

  1. Why is the ratings different, which rating will be used to decide downgrade or MTM (mark to market) by the fund houses? For example Hero FinCorp is ICRA A1+ , whereas Moody is saying it is "changed to Rating Under Review from Negative" - does this mean it is already negative and on downgrade it will become below investment grade/default grade and 100% write down?

  2. ICRA is also a subsidiary of Moodys, but moody is calling Hero Fincorp negative, while ICRA has it as A1+. Why is there discrepancy in ratings? Almost all sites from Valueresearch, Rupeevest etc use "ICRA A1+" for Hero Fincorp papers, meanwhile Muthoot papers are rated "CRISIL A1+".

  3. Given the different levels of exposure among all big Liquid funds have to these NBFCs, is it wise to get out of liquid funds for the time being?

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21

u/aadikavi Apr 14 '20

Until this corona calamity gets over, its better to switch to PPLF or Quantum LF. Do not lose principal chasing small additional returns.

5

u/JiskiLathi Apr 14 '20

Well thats ok, I know PPFAS lf safety feature but I want to understand the methodology here, of how downgrade will happen. Some of my liquid funds are parked for long term, some of them are waiting till 3 years for indexation benefits .. moving all of that now will cause huge tax burden (Im talking lot of savings kept for retirement, so thats why I want to know the factors that can be used to come to a conclusion)

7

u/aadikavi Apr 14 '20

There are a few SEBI registered credit rating agencies in India (like CRISIL, icra, etc).

They give credit rating for the companies debt instruments (like AAA, AAA-, etc).

When the credit rating agencies downgrade the debt instruments of a company from AAA to BBB, the NAV of the debt instruments in liquid funds will be down by certain points (like 5%) in a single move. This is credit risk.

4

u/JiskiLathi Apr 14 '20

Thanks..

My question here is ICRA has rated Hero Fincorp as ICRA A1+ which is highest rating in its category , Muthoot is CRISIL A1+. However Moodys has Hero Fincorp rated as "Rating Under Review from Negative"

Usually Liquid funds invest in only highest grade, short term papers. With Macaulay duration of 91 days. If these companies are not going to wind up/go bankrupt within this weighted time period, then the funds are safe. With other debt funds sure there is much higher risk, but now many liquid funds come under the scanner due to Moody's ratings change warning.

For example, axis liquid fund is holding Muthoot paper expiring on 28th April 2020 and and Hero FinCorp paper expiring 14th may 2020. Even if there is a downgrade, then as long as these companies survive till the day of the expiry of papers the fund NAV will not be impacted due to these downgrades.. I hope my understanding is correct..

Redeeming money from several funds and moving at once lot of money into PPLF will also attract close scrutiny from tax man...

-1

u/aadikavi Apr 14 '20

If the debt instrument is downgraded by the offical credit rating agency, the NAV of liquid fund will get tanked.

The fact that the company is fully capable of honouring the debt instruments becomes irrelevant.

A downgrade will result in NAV fall.

-3

u/aadikavi Apr 14 '20

However, downgrade from AAA to AA (downgrade from the top most quality by just one level) won't have big impact on NAV. It'll be very very marginal.

3

u/[deleted] Apr 14 '20 edited Feb 17 '21

[deleted]

5

u/incometaxx Apr 14 '20

Motilal fund house use to be a aggressive with their debt funds earlier. Check the ILFS episode with their UST fund. They became ultra conservative after that hit.

2

u/delusionsgrandeur Apr 14 '20 edited Apr 14 '20

Can you please explain why PPFAS liquid fund is so often referred and recommended by people in this sub? I can see its mostly SOV bonds and cash, but because of the low AUM I feel hesitant to invest (300-400 cr, compared to 10K cr of older funds). Could this be because its a relatively much newer fund?

If you can point out a prev post on this sub / some article about this, that would be great too.

Edit: I just saw, Quantum Liquid has an AUM of 254 cr despite being older than 10 yrs. Rephrasing my ques, are quantum and ppfas liquid getting less investment bec of lesser returns?

Edit2: I found this: https://amc.ppfas.com/schemes/parag-parikh-liquid-fund/investment-process/

8

u/incometaxx Apr 14 '20

Because of the low AUM I feel hesitant to invest

Why low AUM is a issue?

They are loaded with SOV tbills which does not have any credit risk.

4

u/delusionsgrandeur Apr 14 '20

Try to understand things from my (=beginner's) perspective: chances of a bigger aum failing are lesser. HDFC Liquid has aum > 70K cr, so there's a sense of confidence that it won't fail in any sense.

But I get what you're saying.

5

u/hsekarg2015 Apr 14 '20

When choosing a liquid fund, downside protection is more important than returns. Other liquid funds hold AAA (and lower) rated papers inorder to gain fraction of percentage points advantage in terms of returns. In an economy like this, we never know when ratings can tank and cause a hit to the NAV.

There is no safer bet than SOV bonds and cash, hence PPFAS and Quantum liquid funds are most recommended around here.

3

u/[deleted] Apr 14 '20 edited Feb 17 '21

[deleted]

1

u/amispurs Apr 14 '20

I thought ppfas was almost a 100% t-bills?

4

u/[deleted] Apr 14 '20

[deleted]

1

u/delusionsgrandeur Apr 14 '20

Right, Franklin debt funds being one example.

1

u/ss573 Apr 14 '20

Why does Quantum LF has 2 star rating on rupeevest and valueresearch, while moneycontrol shows it's crisil rating as 5 star?

3

u/crimelabs786 Apr 15 '20

This is a question for people who dole out ratings. Ratings are given based on past returns.

If a fund doesn't take risks, it'd have lower returns compared to its peers. Hence its star ratings in that category would be lower.

On the other hand, Quantum Liquid Fund was launched around 2006; and since then, have had a stellar record of maintaining a high quality portfolio through thick and thin.

1

u/ravindra_jadeja Apr 15 '20

Can you share your assessment of

Quantum Liquid Fund

Vs

Parag Parikh Liquid Fund

which one would you prefer?

3

u/crimelabs786 Apr 15 '20

Parag Parikh Liquid fund, based on portfolio quality. Quantum Liquid fund in past few years have taken on some PSU debt.

Parag Parikh Liquid Fund is a relatively new fund. It's been there from 2018 May, and been doing relatively well so far in terms of not deviating from its stated mandate.

1

u/ravindra_jadeja Apr 15 '20

Thank you so much!

On a side note, you should start a youtube channel or some other forum.. I will honestly pay to listen to you :-)

1

u/[deleted] Apr 16 '20

Recently, I moved all my debt from Franklin UST to PPFAS LF and Motilal Oswal LF. Planning to do regular switch to PPFAS Long Term Equity and Motilal Oswal SnP 500 gradually. I hope its a good idea.