The net asset value (NAV) of PGIM Ultra Short Term Debt Fund fell by as much as 30% in a day after CARE downgraded the ratings on the non-convertible debentures (NCDs) of Anil Ambani’s Reliance Business Broadcast News Holdings to “D”.
The interesting thing to note here is that the fund is rated 4 star on Value Research Online
Picture credits: Valureasearch Online
So what lessons can we learn from this situation?
- Do not invest purely on the basis of ratings given by rating agencies like crisil, value research, morningstar.
Value research explicitly says its ratings are based on a set formula incorporating risk and returns delivered by the fund in the past. It is purely quantitative and there is no subjective component to the Fund Rating.
And hence, always analyze a fund on varied factors including the level of diversification, quality of papers, AUM, etc. before you invest your money in it. If you can’t do it, hire an educated financial advisor to guide you through it.
- AUM size matters
The fund’s AUM is just 41 Crore. A small fund size limits its ability to diversify adequately across companies, sectors and hence, largely increases the risk of default. Nivesh Mitr recommends investing only funds with AUM more than 1,000 Crore.
L&T Credit Risk fund is a very good example for the same which was also holding papers of Anil Ambani’s Reliance Business Broadcast News Holdings. The fund has an AUM of 2500 Crore and hence, holding 60 securities enabling it to diversify adequately. It’s NAV dropped by just 0.78% as it only has an exposure of 1.27% of its portfolio in Reliance Business Broadcast News Holdings papers.
- Is the fund adequately diversified
Check whether/ not the fund is adequately diversified across issuers, sectors to avoid such situations. PGIM Ultra Short term fund was holding 80% of its investment in just one paper – that is Reliance Business Broadcast News Holdings.