Vodafone Idea Bond Downgrade: What should debt fund investors do?

A discussion on what affected investors should do after the Vodafone Idea bond downgrade. Affected mutual funds have started side-pocketing their exposure.

Published: January 27, 2020 at 1:16 pm

Last Updated on January 27, 2020 at 1:16 pm

On Jan 24th 2020, CRISIL announced that Vodafone Idea bonds would be ranked below investment grade paving the way for AMC to side-pocket their exposure. Franklin has already announced this. Others like UTI, Biral and Nippon India are also expected to follow suit. A discussion on what affected investors and in general all debt fund investors do.

A detailed faq on What is a ‘side-pocket’ in mutual funds? How does it work? was published yesterday. For those who do not understand this idea, we recommend you read the FAQ and then come back here.

What should Vodafone idea affected debt fund investor do now? They need to recognise that almost all of the affected funds have risky bonds in their portfolio. So another credit event could happen at any time.  Risk has not ended once the side-pocket has been created.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

If they need the money with the next 12 months, they should exit from the main portfolio of the fund (the segregated section is locked out). If they can wait longer than 12 months, they should ask if they are okay with keeping money in risky debt funds? A bit too late to ask that. Nevertheless, if the answer is “yes”, they can continue.

Rest assured, an AMC like Franklin will have to dabble with credit risk to offset this loss. So one should be prepared for this. Also, to reiterate, this loss is permanent (due to the delay) even if Vodafone Idea honours all its payments.

Remaining invested in the fund because of the side-pocket makes no sense. Even if you exit all your units in the main portfolio, the segregated section will remain as it is.  Investors should exit if they need the money soon or had invested without understanding risks.

Bond credit rating changes are a daily event in the bond market.  Bonds slipping below investment grade occur quite frequently too. The problem is these changes are not taken into account when star ratings are computed.

So investors assume star ratings imply a “good portfolio” and also get enticed by past high returns. A return of 8.5% or 9% is impossible without the associated credit risks. Those who do not understand these must exit from all debt funds or should learn more about them as soon as possible.

This Voda Idea credit event is neither the first of its kind nor the last that we shall see. Those invested in risky debt funds, whether they are affected by this credit event or not should introspect why they invested in the first place, fill gaps in risk perception and get ready to face the music in the past.

An argument put forth by some investors is, “why to take the risk?”, why not stick with RDs, FDs, overnight funds or good liquid funds?”. Yes, we certainly can. There will be a price to pay here too. More taxes, lower returns and reinvestment risk as interest rates head south in future.

Also, it literally takes all kinds to make up a market. We need a robust bond market across all segments and not just for gilts for the health of the equity market. If we do not fund smaller companies and buy only AAA rates bonds, our economy cannot prosper.

However, investors need to be altered to credit changes at an early stage. For example, A downgrade from AAA to AA is barely noticeable in the NAV. SEBI should introduce valuation measures and make the drop significant. This will at least alert risk-averse investors to pull out before bigger falls.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)