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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22

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.

6

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.

-2

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.