After the Supreme court’s verdict on the government’s broader definition of telecom firms’ revenue on which tax is levied. There has been speculations about the going concern nature for telecom companies specially Vodafone-Idea & Bharti-Airtel. In the recent quarterly results, Both companies have posted the large losses due to the tax liability due (Total 74,000 Cr; Vodafone-Idea 51,000 Cr & Bharti Airtel 23,000 Cr). Financial News companies have played on the fear of investors struggling to grasp after the news of DHFL, IL&FS etc by running the news like below:
Debt mutual fund schemes holding bonds of Vodafone Idea could see investor exits following concerns over Vodafone Idea’s deteriorating financial health that has increased the risk of the company’s insolvency. (Link)
Failure of the telecom entity to continue as a going concern will potentially hit several debt schemes holding roughly Rs 2,023 crore worth of Vodafone Idea debt. According to data, schemes of four asset management companies hold the paper. (Link)
Obviously lot of people are scared due to the latest impacts in the debt mutual funds, they do not want to re-live the recent horrors. Most of the so called investors are thinking to redeem the funds or asking the questions should they sell it or not? I wish the answer was this simple. I spoke to many people with same questions and after analyzing only for few of them it make sense to sell the impacted funds.. Surprised???
Let me share an example of a friend holding Franklin India Ultra Short Bond Super Inst since last 2 years and with 18%+ gains and he belongs to the 30% Tax bracket. If sells his fund holding to avoid the potential loss of 3.55% on the Voda-Idea bond exposure, he will end up with a 5.62% (18 x 31.2%) tax for sure. Why would you want to trade a potential lower loss for a sure shot higher out-go?
My only recommendation will be to not just rush to redeem your funds due to these news or series of news articles, but please take a rational decision based on your own situation. Also to remind on the question about going concern, there is always a salvage value so the 100 Rs bond will not become 0. Though I am sure news will turn true due to the principal of reflexivity.