Taurus Debt Mutual Funds Crash Due to Ballarpur Bond Downgrade

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Here we go again! Yet another AMC has been caught on the wrong foot with one of its bonds downgraded in value. This time it is Taurus Mutual Fund which held at least 65 crores of Ballarpur short-term bonds in four of its funds.  In what was a probably a first for the Indian industry, Taurus liquid (a five-star rated fund by VR (direct)) fell by an astounding ~ 7.2%.

As Ashal pointed out at Asan Ideas For Wealth, this means that at the time of the crash, the holding was much higher than the 4% shown at VR. The other funds that fell are the Taurus short-term, ultra-short-term and dynamic income funds.

This fiasco is likely to close down the fund house. And it did not occur overnight!

Ballarpur Industries Limited (BILT) was given an (issuer) rating of A+/stable in Nov 2013 by India Ratings

This was downgraded to RWE (ratings watch evolving) in Sep 2015. This means ‘all may not well’, but we need proof. At this point, if Taurus had sold now … no one would have recognised how responsible the fund house is! And investors may not have got the fantastic returns that followed!

In Dec 2016, the rating became BBB- with a “ratings watch negative”. This essentially means “all is not well” you have been warned. If Taurus had sold now …. repeat the last sentence in above para.

It continued to roll over bonds from this issuer weeks after this. Nothing happened to the NAV. It was climbing up smoothly. The rating was a solid 5 star (at least now, please listen to me and ignore this rating crap).

Yesterday the BBB- became “D”. D for default = delay in interest payment (see above link). Meaning the s**t has hit the fan and guess who was standing underneath?

This episode is a classic example of failed logic. Credit risk cannot be minimised by borrowing for the short term. Whether for a few days (like in this case) or few months, if the borrower is not to be trusted, then do not lend!

SEBI is likely to “react” to this. It is time for it to be pro-active and set stringent credit quality requirements for at least liquid funds. An investor should be able to choose any liquid fund without too much research. This is not possible. We only know the problems when they surface!

Learn more about risks in debt mutual funds

Understanding Credit Rating Risk in Debt Mutual Funds

Understanding Interest Rate Risk in Debt Mutual Funds

Are you a Taurus Debt Fund Investor?

Please wait for clarity from the fund house. Do not be in a hurry to pull out now. Unfortunately, due to SEBI restrictions, a gated withdrawal may not be possible. A redemption now will result in a loss. On the bright side, this can be set off against taxable long-term capital gains. So don’t fret too much about it or beat yourself up about it.

There is no need for investors to shy away from mutual funds either. Safety is governed by how much we understand associated risks.

Lessons to investors

Do not touch a mutual fund if you do not understand risk premium. Lower the credit rating of a bond, higher the returns. As long as there is no downgrade, great returns for the investor (see, how better debt funds are than SB and FDs). Once there is a downgrade …

Do not touch a debt mutual fund if you are not willing to understand risk. Do not listen to your amc or advisor talking about “idle money”.

Do not touch a debt mutual fund unless you can put the effort to understand where it can invest.

Do not touch a debt mutual fund that has given high returns with the 5-star rating. Instead, choose a 3- star mutual fund that invests only in certain types of bonds – banks andPSUss for instance. Sure they can be downgraded too. If you want to avoid all credit risk. Stick to short-term gilts.

Read more: 

Debt Mutual Fund Selection Guides

How and When To Select Ultra Short Term Debt Mutual Funds

Smart Ways to Invest in Corporate Fixed Deposits

How to Select Mutual Fund Fixed Maturity Plans (FMP)

Should I buy Long Term Gilt Mutual Funds?

How to choose debt mutual funds with no credit risk and low volatility

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  1. Just out of curiosity, if we invest in only debt funds which invest in Govt Securities and Sovereigns does this considered in lower risk segment ?

    If debt is also risky then where one should put emergency funds ?

  2. At this point, if “Taurus had sold now …” Don’t confuse debt with equity…debt cannot be sold off like this…there’s no secondary market…once you get into a deteriorating situation, only rescue is to get repaid somehow or salvage through collaterals.

    1. The first now was when the CP was A1+ rated and that could have been sold. The second now was when it became A3. Not too bad either.

  3. CP cannot be sold….nobody will buy a CP below A1+…Also all CPs are bought from issuers only… there is no secondary market like stock exchange for CP’s.

  4. https://www.valueresearchonline.com/funds/portfoliovr.asp?schemecode=9478

    The overall credit quality for this fund is high. And Ballarpur constitutes only 2.4% of the fund. What would have warned a potential/existing investor that the fund could under perform like this? Should a debt fund investor go through every portfolio holding? That kind of defeats the purpose of investing in a mutual fund where we pay for professional management, right?

    I guess, my question is, was there any signal in the fund to highlight this could have significant downside risk?

    1. That 2.4% is old data. I think it should much higher now. Debt investor should understand the fund can invest and keeping a check on its folio once a month is a good practice. The signals were there for the management and they in the quest for higher returns, goofed up. It is possible for investors to pick funds with good credit rating.

  5. Sir, I just checked in both Morningstar and VR online but in both sites for Taurus Liquid Fund portfolio, it doesn’t show as it is holding BBB bonds?

  6. I am an avid reader of your posts, we need a book on debt investing DIY method. I also have one question : could you explain why Birla Sunlife dynamic bond fund and some short term debt funds have drop in NAV ,is it a similar issue.

  7. Agree with Mr. Maheswaran R. Data on this Tarus fund has been very misleading to say the least. It is rated as high quality portfolio with low interest rate sensitivity in review sites. Also, the portfolio contains a limited set of all A1+ rated bonds (till this happened, even now only this BILT is shown with A3 rating). Returns are very conservative and almost comparable to FD interest rates, indicating fund manager is not chasing unrealistic returns. Rated 4 stars by VR. What more can an investor look for? May be concentration risk to see if there are one or more bonds with more than 10% weightage. If the management had information on the poor performance of this BILT bond and had still rolled over, SEBI has to ask Taurus to compensate investors. The investor has really been cheated and is helpless (I am one!).

  8. Sir, for people who had already invested in Taurus Short Term Income fund (incurred around 4% loss as of now), any suggestions on what I could do – e.g., keep & watch for more time vs sell off completely?

  9. Dear Sir, any suggestions on if there is any value in me retaining this in my portfolio, or should just sell it off?

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