Friday, August 28, 2015

Are you aware of the risks of investing in Credit Opportunities Funds?


 Yesterday the NAV of two of the debt schemes of JP Morgan Mutual Fund fell:

 JP Morgan Short Term Income Fund  -3.38% - This is a short debt fund with Avg Maturity of 3.59 yrs and a Modified Duration of 2.01

 JP Morgan India Treasury Fund  -1.73% - This is an ultra short term fund with Avg Maturity of  0.51 yrs and Modified Duration of 0.37

 These schemes, at the end of July 2015 held 15% and 5% of their AUM in one security - Amtek Auto. It seems that Amtek Auto paper was downgraded from AA- to C yesterday.
That is, yesterday, the scrip was downgraded from one which  has high degree of safety regarding timely servicing of financial obligations with very low credit risk to one which is considered to have very high risk of default regarding timely servicing of financial obligations.

Brokers were being approached to get rid of Amtek papers




Spate of NFOs - Credit Opportunities Funds - Read this: Investors searching for high yields floods debt mutual funds

In the last year, there has been a spate of NFOs of Credit Opportunity Funds / Short Term Income Funds. These Funds invest in Corporate Bonds which are rated by credit rating agencies whose analysis I simply do not trust. 

This simply underscores the fact that in choosing to invest in such funds one must understand the risks involved. 

Corporate Bonds are not liquid securities

In addition to the risk of default, investors must note that the Corporate Bond market is not an open liquid market. Trades are through brokers and till the establishment of an online platform for dealing, trading in such securities, deals are not transparent. Any major selling will drop prices. I have had several investors with no idea of the risks involved asking me if these credit opportunities funds were a good place to park money as they expected higher returns that fixed deposits. 


Not really good advice - Commission matters to bankers and sellers




Many of us on twitter have been warning of the risks in such funds and please read the tweets and links below. As LazyTraider has been saying - many of these corporate bond funds have been taking unnecessary risks for earning a few basis points more













What happens now to investors in these schemes?

There will most likely be a spate of redemptions. The AMC took concentrated risk. 15% of the AUM of a small scheme of 400 crore AUM was in one security. 






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