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What do you think of AMCs moving lower-rated bonds to hybrid funds?

The transfer of lower-rated bonds to hybrid funds is not a new phenomenon, says Dhirendra Kumar

AMCs are transferring their lower-rated bonds from credit risk funds to hybrid funds. What is your view on this?
-Tanishq Monga

Yes, AMCs are transferring some lower-rated bonds from credit risk funds to hybrid funds. But hybrid and balanced funds, by their very design, have a portion of corporate debt that is supposed to provide stability to them. These funds have a highly liquid equity portfolio and the corporate debt portion is there to enhance their returns.

At present, the bond market is not undergoing any credit crisis. We have a huge risk aversion that has led to the drying of the market. Investors today believe that A-rated and AA-rated bonds are untouchable or junk. However, this is not true. In fact, many funds are able to realise the part-payments from these lower-rated bonds timely.

So, the transfer of lower-rated bonds from credit risk to hybrid funds may be considered as an opportunistic thing to do. However, this is not the first time that this is happening. If the funds or AMCs are doing something inappropriately or valuing bonds incorrectly, then SEBI will take care of it.

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