Inter-Scheme Transfers by MFs: Are you a Sitting Duck?

In this article, we examine the inter-scheme transfers done by most of the MF houses that have seen huge redemption pressure on their Credit Risk Funds. We would also give our view whether this warrant any review of your existing investment into these hybrid schemes.

Credit Risk Fund category continued to witness redemption during April 2020 as well, more so after six of Franklin Templeton India’s funds in debt category were shut. All AMCs had a tough time in managing the redemption – Rs.19,239 cr of redemption came during the month of April on the AUM of Rs.55,380 cr at the end of March 2020, a decline of almost 35%.

 

Hybrid Funds by nature invest some amount of their portfolio into bonds. Few AMCs smartly used the window of ‘Inter-Scheme Transfer’ and transferred some of the illiquid debt paper from Credit Risk Funds to other funds within the same Asset Management Company (AMC).

 

Now the question arises…. Can they do this?

The answer is yes. ‘Inter-scheme transfers’ are not illegal and can be questioned only if the transfer price is unfair to investors in either of the schemes. However, it may not be prudent for investors who never intended to take credit risk when they actually invested in hybrid funds.

 

We understand that several of them have been forced to take this unpopular call, given current liquidity in low rated bonds. Here are the details of AMCs and their schemes that have undertaken such transaction:


a) HDFC MF transferred ~4% of assets to HDFC Hybrid Debt Fund, 3.3% to HDFC Hybrid Equity and 0.6% to HDFC Short Duration Fund. Most of the inter-scheme transfers are A/AA rated papers.


b) ICICI MF transferred 5.1% of assets to ICICI Pru Equity & Debt Fund, 3.4% to ICICI Pru BAF and 2% to Multi Asset Fund. Here also most of papers are either A or AA rated.


c) Kotak MF transferred 2.1% of assets to Kotak Banking & PSU Fund which belongs to a PSU bank paper (AA rated) and 1.9% to Kotak Savings Fund having top names like Tata, Reliance and Godrej.


d) Aditya Birla MF transferred 7.4% of its asset to Short Term Fund, 3.2% to BAF, 2% to Low Duration and 1.2% to Regular Savings Fund. However, all most all papers are AAA rated and carries much lower risk, in our view.


e) DSP MF transferred 2.9% of its assets to DSP Equity & Bond Fund which are of AA/AAA rated.


f) Nippon India MF transferred 3.0% of assets to Low Duration Fund and 2.7% to its Equity Hybrid Fund. However, all papers belong to A rating and carries slightly higher risk.


g) SBI MF has transferred only ~0.5% of its assets to SBI Hybrid Equity Fund which is a small and are AA rated paper.

Market Value of bonds transferred from Credit Risk Funds to Other Funds:
Aditya Birla MF:
DSP MF:
HDFC MF:
ICICI MF:
Kotak MF:
Nippon India MF:
SBI MF:


These transactions are based on market prices provided by the valuation agencies. Although there may not be immediate risk of downgrade or default on these bonds, it is not in the right spirit for AMCs to transfer the low rated bonds into Hybrid Funds. For eg. Balanced Advantage Fund (BAF) category is not the place where you take a credit or duration risk. Ideally AMCs should run this portfolio with 2-3 years kind of duration along with high credit quality. It is because as an investor, I will not go for BAF category if I want to take credit risk in my portfolio.


Do we need to exit from these funds?

Most of the transfers have occurred in large size hybrid funds that have used the AUM size to their advantage to subsume these risks. As these transfers have not resulted into any material change in the composition of their debt portfolio (as on April 2020), we are not recommending our clients to switch or exit from these funds. However, we should be aware of such moves by these AMCs and can’t be ‘Sitting Duck Investors’.

 

We at DreamLadder, closely watch these developments so that you can have a peaceful sleep. We will continue to educate you and give you heads-up, if there is any change in the risks associated with your portfolio.

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