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Following Franklin, pain spreads to other mutual funds with Vodafone Idea exposure


Following a 100% write down by Franklin Templeton Mutual Fund on Thursday of its Vodafone Idea debt holdings, other mutual funds have also seen drops in the value of their holdings. Aditya Birla Sun Life Mutual Fund, Nippon India Mutual Fund and UTI Mutual Fund saw cuts to their debt funds on Friday as valuation agencies marked down Vodafone Idea paper. The highest drop was in UTI Credit Risk Fund which saw a 10.42% fall in Net Asset Value (NAV). The write downs were in response to the Supreme Court’s AGR ruling on 16th January. Vodafone Idea has become liable to pay dues of around 50,000 crore by 23rd January.

The NAV drops were 30-60% of the actual exposure of schemes to Vodafone Idea, implying that there could be further loss of value if the company actually defaults or is downgraded by ratings agencies. The latter have been slow to change the Vodafone Idea rating below investment grade, preventing mutual funds from creating side pockets. Side pockets or segregated portfolios allow a mutual fund to carve out its exposure to bad paper while allowing investors to redeem units in the rest of the scheme. These side pockets also stop speculators from entering the scheme and benefiting from recovery in the debt at the expense of the original investors.

Franklin Templeton AMC imposed a limit of 2 lakh per investor per day into its schemes hit by Vodafone Idea exposure. However none of the other AMCs have moved to restrict inflows, leaving them vulnerable to entry by speculators. “Vodafone comes from a pedigreed industrial group and one very large multinational. When you push such a company to the brink by an AGR order, this has no precedence in any risk model. The company won cases in TDSAT and High Court, before the adverse ruling in the Supreme Court,” said Amandeep Singh Chopra, Group President and Head Fixed Income at UTI Mutual Fund in an interview to Mint. “The actual amount is 11,000 crore which has been made into 50,000 crores due to penalty and interest. Even the biggest industrial house in the country cannot pay 50,000 crore in 3 months,” he added.

Investors who exited the affected schemes on Friday were hit by the unannounced sharp drops in NAV. However those remaining put run the risk of further write downs. They also run the risk of rising exposure to bad paper in the portfolio, as the schemes in question sell high rated paper to meet redemptions. “Investors in Franklin schemes have already seen the value of Vodafone papers written down completely leaving no further downside from the papers. Assuming they signed up for the credit risk involved and are happy with the overall strategy and the remaining portfolio of the fund house, they can stay put. Those in schemes other than Franklin ones, should evaluate two factors. First, their potential loss from further write downs and second the costs of exit such as exit load and tax. Depending on which factor has higher weightage, they should make a decision,” said Amol Joshi of Plan Rupee Financial Services.

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