Mutual Funds betting on government debt to avoid risk

The mutual fund industry is moving more towards the sovereign and sub-sovereign debt instruments while reducing their exposure in the corporate debt market -- a trend which may be seen as risk averseness by the industry.

An analysis of data available with Sebi by DH reveals, the exposure of mutual funds in the commercial papers (CPs) of various companies has come down by 29.8% since July 2018. The larger decline has been in the CPs of the real estate and the shadow banks, which have declined by 80.9% and 42.7% since the shadow banking crisis imploded in July last year.

The total exposure of the MFs to the commercial papers at the end of October stood at Rs 3.45 lakh crore, while CPs of the real estate firms made-up Rs 796.1 crore of this exposure and non-banking financial corporations made up Rs 90,369.5 crore. The two sectors still make up 26% of the total exposure to CPs.

"Mutual funds have been consciously moving away from CPs of shadow banking given the current state of the sector," said Madan Sabnavis, Chief Economist at CARE Ratings.

Commercial paper is a money-market security issued (sold) by large corporations to obtain funds to meet short-term debt obligations (for example, payroll) and is backed only by an issuing bank or company promise to pay the face value on the maturity date specified on the note.

The MFs have been cutting down their exposure towards the corporate debt -- majorly contributed by trimming the exposure towards real estate and shadow banking sectors. The shadow banking exposure in the corporate bond market came down by 11.2% since the beginning of the shadow banking fiasco, while real estate exposure came down by 15.8%. As of date, the corporate debt exposure of mutual funds stands at Rs 4.01 lakh crore, of which NBFCs make up Rs 95,829 crore, while real estate makes up Rs 5,992 crore of the exposure. The two sectors combined, still make up one-fourth of the total exposure.

"The fund managers too have become risk-averse in lending to real estate sector which in fact is secure and safe as any other assets but due to slowdown (natural cyclical cycle) in the sector they have reduced the lending to the lucrative opportunity. Though the reduction in the Realty and NBFC sector can also be attributed to the SEBI diktats recently, on the whole, we can see behaviour biases are at work even at institutional levels," said Umesh Mehta, Head of Research at Samco Securities.

Experts attribute this to the lower issuance of the CPs. "One reason for lower issuances is because of MFs not willing to invest in CPs of some companies. For the CPs that are issued there is good demand," say analysts.

In turn, the investments in government securities, treasury bills, PSU Bonds, Bank Certificates of Deposits -- instruments generally considered as risk-free -- have seen a huge surge in the exposure from MFs. The investment of debt MFs in the G-secs has surged by 12.8% to Rs 88,698.4 crore, T-bills 91.2% to Rs 89,820.9 crore, PSU Bonds by 33.7% to Rs 1.82 lakh crore and CDs by 30% to Rs 1.54 lakh crore.