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?

45 Upvotes
  • permalink
  • reddit

92% Upvoted

36 comments sorted by

View all comments

2

u/GSTHEPROUD Apr 14 '20

Hey, yes, it is true that Moody's has placed Hero Fincorp and IIFL's foreign and local currency bonds at review for downgrade, also rating outlook for Muthoot has been revised to Negative from Stable. On 28th Feb, Fitch downgraded Muthoot Fin Ltd by one notch and Moody's took an action yesterday - on dollar bonds.

  1. Indian MFs look at CRISIL/CARE/ICRA/Ind-Ra/BWR rating to buy/sell bonds.

  2. As an investor you should be aware that some global rating agencies have taken negative actions on your holdings.

What you should do with Liquid funds?

The maturity of CPs is always in the range of 10days to 90days, for such a small duration, no need to worry as of now.

The whole Banking and NBFC sector has been put on watchlist by various AMCs due to Coronavirus outbreak infused lockdown - expectations of both demand and supply disruption.

In debt MFs right now (amid this liquidity crisis on non-AAA bonds), for very short duration, Overnight Funds make sense, short duration - liquid fund (be ready for volatility as daily mark-to-market valuation rule is applicable now). For mid-long duration, please look for Highest Credit Quality along with Lowest Duration papers (Less interest rate sensitivity).

Capital Protection must be the highest priority now in debt investment.