On June 4th, 2019, Dewan Housing Finance Limited was supposed to pay interest on NCD it had issued.
DHFL defaulted on its payment obligation and the impact of it was seen on Mutual Fund NAVs. So, how concerned should we be about this?
Allow us to give you some numbers.
On June 5th, 2019, CARE ratings downgraded DHFL Debt worth 1 Lakh Crore to default. Yes, you read that right! 1 Lakh Crore! This includes all Non-Convertible Debentures and Fixed deposit program of DHFL.
In addition to that, ICRA and CRISIL downgraded DHFL’s Commercial Paper rating to default which was worth 850 Crore!
(For easier understanding, Commercial Papers are short term instruments usually used by Liquid, Ultra Short term, Money Market and Low duration funds.)
We mentioned that Mutual Funds NAV took a hit because of this default. Total Mutual Fund industry exposure to DHFL debt papers is 6,486 crores as on 30th April 2019. (The portfolio data for the month of May is yet to be released)
Below are the top 10 funds and their NAV drop in one day:-
Source: MFI Explorer
The perception of debt funds being safe is clearly broken in these cases.
How this fall in NAV has occurred?
Post the event of default, mutual funds have to mark down their NAV by 75% as per the rules of SEBI. And since the credit rating was officially downgraded to default by credit rating agencies, mutual funds wrote off entire exposure of DHFL papers.
Even after the credit rating downgrade, DHFL has said that they will honor their interest obligation in next 7 days. If it happens, then NAVs will go up again. If not, then the fall in NAV will be there until the amount is recovered.
What should you do now, if your fund has seen such fall in NAV?
If you have seen the fall in NAV in the mutual fund you hold, the damage is already done. If you do not need the money, then you should hold on to the investment. If DHFL makes interest payment in next 7 days, then your investment will go up and you can exit the fund. If DHFL does not make the payment, then the NAV will remain at the current levels and will go up whenever the fund receives payment.
Hence, in either case, hold on to the investment depending on your time horizon.
But was this avoidable?
The first time, the issue in DHFL flared up was during September 2018, when there was a liquidity crunch in the debt market because of IL&FS default. And after that, it kept getting worse.
However, you could have avoided exposure in this fund and we will tell you how.
Below are the credit ratings given to DHFL by three big credit rating agencies viz. ICRA, CRISIL, and CARE: –
It is clear that the rating downgrade has been gradual and not overnight. Anyone tracking the credit rating over a period of time could have taken an action on a fund with exposure to DHFL before actual credit rating downgrade to Default.
But isn’t it a job of the mutual fund manager?
Well, Yes. Mutual Fund managers are supposed to do this analysis. But some fund managers, have been taking higher risk in order to deliver higher returns. Hence, we believe that there has to be a two-way check on the debt mutual fund portfolios. If you are a DIY investor and can find time to do this analysis on your own then you should.
However, It is very difficult for an investor to go in depth and analyze these factors.
For this very reason, we recommend investor to work with a financial advisor, who is capable enough to guide you through such turbulent waters.