The Covid-19 pandemic has wreaked havoc across the financial markets. In an all-consuming rage, it has spared nothing. Even the hitherto steady fixed income market is shaken. Investors are concerned about credit quality and liquidity of the underlying instruments. In such unbridled times, we review the banking and PSU (public sector undertaking) category, which invest 80% of their assets in debt instruments of banks, PSUs, public financial institutions (PFIs) and municipal bodies.
Better credit and liquidity profile compared with other categories
Let’s start with credit quality. By design, these funds primarily invest in top-rated instruments of the debt market – bonds and debentures issued by banks, PSUs and PFIs – thus providing a better credit profile for investment compared with most other mutual fund categories.
Credit quality comparison among debt funds that were ranked in the Crisil Mutual Fund Ranking of March 2020 shows that banking and PSU funds have predominately invested in top-rated papers versus most other categories with portfolio average maturity above one year. The average exposure of these funds to AAA rated papers (includes cash and current assets/G-sec and SDL) stood at 92.4% in April 2020. Exposure to similar AAA papers stood at 53.0% for medium duration funds, 71.9% for dynamic bond funds, 83.6% for short duration funds and 90.7% for medium to long duration funds, while long duration and corporate bond funds had higher exposure at 97.2% and 97.6% respectively.
In addition to having higher investments in top-rated papers, a deep-dive analysis of the rating profile shows that the category had the least amount of investments in securities that had ‘negative’ or ‘watch negative’ outlook by rating agencies. The category had just 1.4% of exposure to such securities as of the latest portfolio disclosure (April 2020). The next best were medium to long duration funds with 1.5% exposure to such securities, while credit risk funds had the highest exposure of over 27.4% to such instruments.
Further, analysis of debt mutual fund portfolio liquidity of corporate bonds based on Crisil’s internal model that factors trades and spreads of issuers show that the category also has relatively high liquidity in the underlying portfolio, enabling the fund manager to rebalance the portfolio more efficiently. Analysis of their portfolio for month of April 2020 reveals that banking and PSU funds enjoyed the average exposure at 94.6% to liquid assets (includes liquid corporate bond issuers, sovereign papers and cash & equivalents) only marginally lower than long duration funds (95.3% exposure). Among other similar debt categories, medium to long duration funds had 82.4% exposure, corporate bond funds had 81.9%, dynamic bond funds had 72.7%, short duration funds stood at 71.4%, medium duration funds had 51.2% and credit risk funds had 25.3% of their portfolio in similar liquid assets.