DHFL Crisis: How to handle your debt mutual funds now?

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As you know by now, DHFL has failed to pay interest on its bonds in time and the NAV of several debt funds fell sharply (and that is an understatement for some!) on Tuesday night.  If you are affected, here is what you should do. If you are not affected, here is how you can lower risk to your capital.

The inability to pay interest on time was called a delay by the company and default by others. On 5th June 2019, Crisil and ICRA downgraded the bonds to Default category. Most mutual funds holding these bonds had marked down the holding by 75% (since they were secured else it would have 100%). Few more funds are expected to markdown NAV on 5th.

Meanwhile, the company issued this statement in response.

The action by the rating agencies is extremely surprising as the Company has been making & continues to make substantial efforts in ensuring no defaults on any bonds, repayment of its financial obligations.
These actions are unwarranted and the Company is seeking clarification on the rationale that predicts DHFL’s inability to service pay‐outs on the due dates. Such a speculative rating rationale is not adequate.
Since September 2018, DHFL has repaid close to Rs. 40,000 crores of financial obligation. To ensure adequate liquidity to meet the repayments, DHFL also sold its strategic retail assets including Aadhar, Avanse and DHFL Pramerica Asset Managers. The Company is committed towards ensuring repayment of all its obligations as well as onboarding the strategic partner for its business.

DHFL Crisis: How to handle your debt mutual funds now?

So in the next few days, it will become clear if DHFL will be able to pay interest or not. Even if they pull that off, what about the next interest schedule? Readers must be aware that as mentioned in the statement, this situation is not new.  Their shares dropped 42% on bond default fears in Sep 2018 and their chairman, Kapil Wadhawan,  said

“DHFL has neither defaulted on any bonds or repayment, nor has there been any single instance of a delay on any of its repayment liabilities,

And now we know!

DHFL Share PriceThe writing seems to be on the wall for the company. They cannot meet their obligations unless continue liquidating their assets. Unfortunately, mutual funds have now found themselves in a position where they will have to wait.

Every time this happens, the lack of depth in the debt market becomes clear. If a bond drops in rating or credibility it becomes untouchable. So as investors start pulling out at the first sign of trouble, the exposure to the bad bonds keeps increasing and when the s*** hits the fan, fall in NAV is huge as the fund manager is not able to sell. This fund has about 15% of DHFL while the limit is only 10%. Unfortunately, the limit can be maintained only if the AUM is steady (it is only 184 Cr now)

Tata Corporate Bond Fund NAV Fall due to DHFL CrisisHowever, this is not universally true. UTI Short Term Income Fund with 4220 Crores fell by 9.43% as it holds about 8.4% of DHFL.  If a fund manager cannot offload about 355 Crores of debt before it defaulted in the last 8 months, I do not know what to say. Is the debt market really that bad or has UTI (and other AMC in a similar position) acted irresponsibly?

With each passing day, it has become more and more difficult to recommend debt mutual funds. I am walking on a wire with my Handpicked Mutual Funds April 2019 (PlumbLine)!

Are your debt funds affected by the DHFL Crisis?

Wait for a few days to check if DHFL can pay back the interest.  They probably might be able to pull off this interest installment. Even if they do, the NAV will not fully recover and they will be a loss.

In situations where the fall has been large, AMCs are likely to enable side-pocketing. That is the good portion of the portfolio will be segregated from the bad. You can pull out of the good portfolio and wait for the bad portfolio to be sorted out or pull out altogether.

Meanwhile CNBC TV18 tweets:

|DHFL gets RBI’s approval for sale of Avanse Fin to Warburg Pincus; DHFL says divestment of stake in Avanse Fin expected to be completed shortly

DHFL Crisis CNBC TV 18 developmentsSo wait a few days for developments and then pull out.  Your returns will anyway be affected as shown in yesterdays video

I am not affected by this crisis but am scared to invest in debt funds

  • Then pull out of all debt funds and stick to FDs.
  • Stick to liquid funds or overnight funds
  • Or Gilts for long term goals

Read: How to choose a liquid fund in 2019 by minimizing credit risk

PlusWorried about risk in debt mutual funds? Park your money in overnight mutual funds

Plus: Gilt Mutual Fund User Guide: When and How to use them

Get: Free E-book: A Beginner’s Guide To Investing in Debt Mutual Funds

Do you have questions about this crisis or debt funds in general? Leave them below and I will try and answer.

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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  1. I am holding 300 shares of DHFL @450. Is it a good time to purchase more and reduce the average cost or to sell at the current levels and invest in some other company

  2. Dear Sir,

    You use to recommend the the UTI Treasury advantage fund in your plumbline earlier, I have sucked in to it. You should admit your failure on putting the investors through this.

    An old investor.

  3. I deposited 10 Lakhs in company deposit scheme of DHFL which will mature in November 2019. Can you please suggest me what I have to do at this juncture.

  4. Victim here Professor, because of IL&FS in the past, now DHFL. The exposure was to DHFL is 2.2% for my fund. I wanted to get more return than a FD, so I don’t blame them completely. And I thank you for your emphasis on restricting to ultra short term funds and not beyond, with AAA quality, low average maturity etc.

    I just invested in this fund a few weeks ago, I should have waited for sometime or should have discarded this fund altogether when I saw DHFL in its portfolio, as I knew the company was in troubles. My mistake.

      1. You guided right but I lost handsomely as new losses have come to my notice. While my L&T fund fund fell 2.2%, my UTI fund fell 12%, as it has 6.7% exposure to DHFL, its highest allocation of its PF.

        So the gains of 2 years evaporated in 1 day.

  5. Pattu: With debt funds becoming risky, what instruments can we use for the debt portion of our portfolio which are low risk, tax efficient and can beat inflation? Can you please do a post on this?

  6. I lost ~ 1 L in UTI Treasury and 30 k in Tata Treasury. I was thinking of redeeming from both of them for a long while but greed got good of me. I wanted to save STCG. But I am withdrawing now as UTI treasury advantage is in a free fall. Yesterday again it fell ~ 3 %. This will happen because people are pulling out from the fund. This is no longer about fundamentals. Even good script will be sold at loss to cover redemption.

    Anyway I learnt a big lesson. Don’t think of saving tax when trouble starts. !!!

  7. Sir,
    For the debt part if one wants to restrict himself to ultra short term and short term mutual funds apart from liquid funds, what should be the choices…..

  8. Pattu Sir… Me and my wife have been investing in Franklin Ultra Short Term and DHFL Pramerica Low Duration fund…

    Invested amount was 2.05 lacs. Current value is 1.85 lacs. Should we exit immediately accepting loss? Or a wait will recover some loss?

  9. Dear Sir,
    Big fan of your templates. Thank you for that. I have seen a ~10% drop in NAV in Baroda Treasury due to DHFL exposure. Have been waiting patiently since the event, but, no outcome in sight. Does it make sense to wait it our or take a haircut and exit? Please advise.

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