Beating concentration risk

Crisil8217;s analysis has revealed that while the credit quality of the portfolio of most Indian debt funds is strong...

Crisil8217;s analysis has revealed that while the credit quality of the portfolio of most Indian debt funds is strong, portfolio concentration may be a cause for concern. According to a Crisil report, almost all debt schemes have significant exposure to at least one sector. Crisil has defined portfolios where more than 25 per cent of the asset under management AUM is exposed to a single industry or company as 8216;significantly exposed8217;. 50 per cent of the schemes have significant exposure to the banking sector, and 38 per cent to the non-banking financial company NBFC sector. Contrary to popular perception, only 5 per cent of the AUM of debt funds is invested in the real estate sector. The 860 schemes analysed cover 96 per cent of the AUMs of Indian debt funds equivalent to Rs 3.02 lakh crore.

The risk

About 30 per cent of the smaller schemes have significant single-company exposure, while the larger schemes are well-diversified. A concentrated portfolio increases the risk of investors losing a large portion of their capital in the event of a single default. Single-company exposure is riskier than single-industry exposure because it implies even lower diversification.

The cause

The high concentration level reflects the limited investment opportunities available in the debt market. 8220;Most of the debt papers are issued either by banks or NBFCs. Manufacturing companies have not been issuing debt papers as they find borrowing outside the country cheaper. The process of issuing debt paper was cumbersome. This has been recently simplified by the government. So these debt schemes compensate for the lack of diversification by investing in good-quality paper,8221; says Roopa Kudva, managing director and chief executive officer of Crisil.

The solution

The downturn in equity market has made it difficult for companies to raise money there. 8220;In the last four weeks, there has been an increase in the number of debt issues by manufacturing companies. Over the longer term, the solution to concentration risk lies in having a more vibrant debt market with a much wider issuer base than exists in the country today,8221; adds Kudva.

What should you do

Nearly all schemes provide their holdings on a monthly basis. The investor would do well to examine the portfolios of the scheme he plans to invest in before putting in his money. 8220;It makes sense to be careful about the investment structure of the fund. Active follow up and scrutiny of the portfolios of schemes regularly is the only way investors can safeguard themselves,8221; says Prasunjit Mukherjee, a Kolkata-based mutual fund analyst. n

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