Almost all debt categories saw an improvement in their liquidity profile.

Debt MF continues to strengthen amid rallying belongings

In March 2020, debt mutual funds (MF) noticed their second-largest outflows of 1.94 trillion due to liquidity worries spawned by covid-19. It has been an about-turn thence. Between April 2020 and November 2021, the trade noticed as a lot as 3.29 trillion of internet inflows. That, coupled with mark-to-market positive factors of underlying belongings, has meant debt mutual fund portfolios surged to a document 14.74 trillion in August 2021. They closed November at 14.52 trillion. This sharp restoration in belongings has additionally been supported by enchancment within the portfolio profile of debt MFs.

We checked out three main parts of the portfolio of open-ended debt mutual fund portfolios: Credit standing composition, liquidity of securities, and sensitive-sector publicity. The final element was based mostly on Crisil Analysis’s Business Threat Rating.

Scores profile: The trade’s mixture funding in top-rated paper, authorities securities (G-secs) and state improvement loans (SDLs) has elevated 700 foundation factors (bps) to 94% in October 2021 from 87% through the center of the liquidity disaster in 2020.

Issuers with a adverse score outlook within the debt MF portfolio declined to lower than 1%, in October 2021 from a excessive of ~7% in April 2020, exhibiting important enchancment within the general rankings profile of the invested cash.

There was a cloth enchancment within the rankings profile throughout classes. Medium-duration, dynamic bond and ultra-short funds with notable publicity to lower-rated paper in March 2020—at 49%, 33% and 31%, respectively—have seen these respective numbers fall to 35%, 13% and 9% as of October 2021.

Liquidity profile: On the peak of the disaster in March 2020, the trade’s publicity to liquid issuers stood at round 72%; this elevated to 82% as of October 2021.

The profile of liquid issuers continued to be skewed in the direction of G-secs, SDLs and AAA-rated papers, with their share growing to just about 99% from 97% in March 2020.

Nearly all debt classes noticed an enchancment of their liquidity profile. Credit score-risk and medium-duration funds diminished their publicity to illiquid issuers to 38% and 22% in October 2021 from 58% and 35%, respectively, as of March 2020.

Publicity to delicate sectors: The trade’s publicity to Crisil-defined delicate sectors has declined, with the general asset publicity shrinking to lower than 30,000 crore (2%) of the class belongings, as of October 2021, from 58,000 crore (6%) as of April 2020

Publicity to delicate sectors, too, declined throughout most classes, with credit-risk funds and medium-duration funds witnessing the sharpest plunge to 9% and eight% in October 2021 from 27% and 23%, respectively as of March 2020.

View Full Picture

Debt MF

A possible third wave of the covid-19 pandemic is the important thing near-term threat to this credit score outlook. Any sharp withdrawal of stimuli by world governments and regulators will even be a key draw back threat over the medium time period and will influence the credit score profiles. That, in flip, would influence mutual fund portfolios. It can be crucial have a look at debt funds by way of a number of lens and never get fixated by a single parameter earlier than making their funding selections. A correct evaluation / monitoring mechanism ought to take priority of their funding planning to assist evade the danger related to unhealthy decisions.

Jiju Vidyadharan, senior director, Funds & Mounted Revenue Analysis, Crisil.

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