Pre-empting this kind of quick ratings turnaround is understandably beyond the skill set of a financial planner or advisor. Securities issued by some other group companies were already under watch and some got further downgraded to below investment grade. However, as on 17 September, IL&FS Financial Services was downgraded to D. The rating rationale for IL&FS Financial Services Ltd was reaffirmed A1+ (top most rating-highest probability of repayment).
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On credit quality, IL&FS group’s debt securities looked good till a month and a half ago. Advisors too aren’t analysts-what they can do prudently is check portfolio credit rating quality and concentration level. But it is unreasonable to think that an average debt or liquid fund investor will be able to prematurely identify default risk. It is easy to say, in hindsight, that investors should stay away from funds that invest in such risky securities. Unlike listed equity where investing outcomes as graded, in debt investments you will either get your money or you won’t-this binary nature exaggerates the immediate pain to an even greater degree. But rather than asking where the blame lies, let’s focus on where the change should lie. No one likes to take the blame for unforeseen outcomes and perhaps that’s why something like this is often termed as an accident. Asset managers, advisors, credit rating agencies or even the regulator? Are the prescribed guidelines for valuing downgraded bonds enough when such cases appear? Should the regulator counter question the asset manager or the rating agencies? Several comments around this issue on social media and in published columns focus on where the blame lies. As an investor, if I see even a single-day negative return from the fund to whom I entrust my emergency and contingency money, I will panic. Such a large write-off in the value of a security can lead to a negative return.
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After all, aren’t liquid funds the ideal alternative to your savings bank account with daily liquidity being one of its best features. And this is where it starts to get murky. After the latest credit downgrade to a rating of D, mutual funds have now had to write off half the value of these securities held across various schemes. Roughly, ₹ 1,300 crore of total exposure in IL&FS securities was reflecting in short duration funds, including liquid funds that held around ₹ 400 crore.