Debt Funds on WebNotes

DHFL default impact on credit-risk funds

Tue, 12 May 2026 00:00:00 +0000

The DHFL default and its impact on credit-risk mutual funds unfolded through 2019 and 2020 as Dewan Housing Finance Corporation Limited (DHFL), at its peak India’s third-largest private housing finance company, progressively ceased to service its market borrowings, ultimately triggering the first use of the Insolvency and Bankruptcy Code (IBC) against a financial services entity. For Indian credit-risk funds and other debt mutual fund schemes that held DHFL’s non-convertible debentures (NCDs) and commercial paper, the episode produced significant NAV write-downs, accelerated redemptions, and reinforced the market’s already-heightened post-IL&FS scepticism about the creditworthiness of non-bank lenders. The episode also produced SEBI’s first large-scale enforcement exercise around credit risk classification and side-pocket usage.

Franklin Templeton six-scheme winding-up (April 2020)

Tue, 12 May 2026 00:00:00 +0000

The Franklin Templeton six-scheme winding-up of 23 April 2020 was the abrupt and unilateral closure of six fixed-income open-end mutual fund schemes by Franklin Templeton Asset Management (India) Private Limited, trapping approximately Rs 25,000 crore (then approximately USD 3.3 billion) of investor assets at the outset. The closure, announced without prior public notice or investor consent, constituted the largest simultaneous wind-up of open-end mutual fund schemes in Indian history. It set off protracted legal proceedings before the Supreme Court of India, a landmark enforcement action by the Securities and Exchange Board of India , and fundamental regulatory changes that reshaped the liquidity and governance framework applicable to all debt mutual funds in the country.

IL&FS default impact on debt funds (2018)

Tue, 12 May 2026 00:00:00 +0000

The IL&FS default of September 2018 marked the most consequential single credit event in the Indian debt mutual fund market in the decade preceding the COVID-19 crisis. When Infrastructure Leasing and Financial Services Limited (IL&FS) and its subsidiaries began defaulting on short-term commercial paper and non-convertible debenture obligations in September 2018, mutual funds holding these instruments suffered immediate net asset value (NAV) write-downs, interbank and capital market credit flowed sharply away from non-banking financial companies (NBFCs), and the Securities and Exchange Board of India was compelled to introduce a suite of emergency and structural regulatory measures. The episode revealed deep weaknesses in credit risk assessment, concentration management, and valuation practices within Indian fixed-income mutual funds and accelerated reforms that reshaped the industry for years.

JP Morgan India Amtek Auto incident (2015)

Tue, 12 May 2026 00:00:00 +0000

The JP Morgan India Amtek Auto incident of August 2015 was the first instance in Indian mutual fund history in which an asset management company unilaterally suspended redemptions from open-end debt schemes following a credit event. JP Morgan Asset Management (India) Private Limited restricted redemptions from its India Short Term Income Fund and India Treasury Fund after Amtek Auto Limited’s non-convertible debentures (NCDs) held in those schemes were downgraded to below-investment grade, triggering an immediate write-down of NAV and a liquidity crisis within the funds. The episode preceded the more systemic IL&FS default of 2018 and Franklin Templeton winding-up of 2020 but established many of the procedural and regulatory questions those later crises would reopen at far larger scale.

NAV cut-off time reform for mutual funds (1 February 2021)

Tue, 12 May 2026 00:00:00 +0000

The NAV cut-off reform effective 1 February 2021 was a fundamental change to the rules governing which net asset value (NAV) is allotted to a mutual fund investor’s purchase transaction, implemented by the Securities and Exchange Board of India through Circular No. SEBI/HO/IMD/DF2/CIR/P/2020/253 dated 31 December 2020. Prior to this reform, mutual fund purchases above Rs 2 lakh in debt schemes were allotted the same-day or next-day NAV if the transaction application was submitted before the scheme’s cut-off time, regardless of whether the investor’s funds had actually reached the AMC’s account. The reform mandated that the applicable NAV be allotted only after the investor’s funds were realised in the AMC’s bank account, regardless of the time of application submission. This change eliminated a timing arbitrage mechanism that had been exploited by large institutional investors and treasuries in debt funds.

Side-pocketing introduction in Indian mutual funds (2018)

Tue, 12 May 2026 00:00:00 +0000

Side-pocketing, formally termed “segregated portfolio” in Indian regulatory terminology, is a mechanism that allows a mutual fund scheme to separate debt or money market instruments affected by a credit event into a distinct sub-portfolio, ring-fencing the impaired assets from the main portfolio and protecting ongoing investors from dilution by redemption outflows. The mechanism was introduced in India by the Securities and Exchange Board of India through Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/160, issued on 28 December 2018, directly in response to the valuation and fairness challenges exposed by the IL&FS default of September 2018 . Side-pocketing had been debated in the Indian mutual fund industry for several years before the Association of Mutual Funds in India recommended its adoption in the wake of the IL&FS crisis.