COVID19 to WEALTH20 : Lakshmi Iyer, Kotak Asset Management

• Credit Risk is relevant to all bonds apart from the Sovereign papers so we have to always be mindful of this while investing in any debt product. Liquidity corporate bond compared to GOI SOV papers is always low and hence imbalances have occurred. Franklin incident is an unfortunate event, but at the same time it is an exceptional incident which has happened as one of its kinds because of COVID 19 which is also one of its kind. COVID led to Corporate bond fund market becoming almost illiquid. Since Franklin funds faced unusual redemptions, and since corporate bond market had reached a level of illiquidity, FT had no option but to wind up schemes to stop the redemptions as that would have led to huge losses to investors who remained in the funds on account of selling of underlying securities at huge discount to fund the redemption.

• Illiquidity is different from a credit event. When an investment is done by a fund manager, a lot of factors are seen, and non AAA doesn’t imply a possible credit event. Debt mutual fund industry is quite resilient, and the case in point is that the Redemption seen in Debt MFs industry was close to Rs 25000 Cr in less than 25 days post FT incident, and all of this was funded without borrowing. Fixed Income portfolios have done reasonably well despite the upheavals in the last few years. There is no point of painting the entire canvas with the same brush.
 
• Debt is an important asset allocation in any investors’ portfolio and should not be avoided and within debt the tail end of the portfolio can definitely see some allocation in corporate papers as the spread compared to GOI or PSU papers is extremely attractive and gives an overall balance to portfolio. Where one 1 year G Sec is at 3.5% to 4%, the CD or a CP (corporate paper) of similar duration in a AA category is available at 8.5% to 9%. Basically, there is a massive spread. Hence, Corporate debt via a low duration to short term funds, definitely throws a nice opportunity for investors at this point in time.