Kotak Mutual Fund has temporarily frozen new investments into its Medium Term and Credit Risk funds. The decision follows a Supreme Court ruling that overturned the 2020 write-off of Yes Bank’s special AT-1 bonds. The fund house is pausing inflows to prevent the dilution of existing unitholder value while it navigates the valuation uncertainty created by this legal development.
Kotak Mutual Fund has taken a significant step for its debt investors by stopping all new investments—including lump sum, systematic investment plans (SIPs), and switches—into its Medium Term Fund and Credit Risk Fund. This decision comes immediately after the Supreme Court of India delivered a verdict on the long-standing legal battle regarding Yes Bank’s Additional Tier-1 (AT-1) bonds.
In 2020, during the financial restructuring of Yes Bank, these specific bank bonds were written off, meaning their value was marked to zero in the books of various mutual funds, including these two schemes from Kotak. However, the Supreme Court recently upheld a previous Bombay High Court order, which declared those write-offs as legally void. This sudden legal reversal creates a complex situation for asset managers who held these bonds in their portfolios.
The fund house explained that this pause is a protective measure. When an asset that was previously considered worthless suddenly gains potential value due to a court order, it requires careful re-valuation. If the fund allowed new money to flow in before this re-valuation is settled, it could cause the value for existing investors to get diluted. By stopping fresh inflows, the fund aims to manage this uncertainty while it determines the new value of these underlying bonds.
For investors, the immediate impact is that they cannot add more money to these specific schemes for the time being. Importantly, the fund house has clarified that this does not prevent existing investors from staying invested or redeeming their money if they choose to do so. The situation highlights the risks associated with debt funds that hold exposure to distressed or legacy assets, where court decisions can drastically change the value of the portfolio overnight.
Moving forward, investors will need to watch for updates on how the valuation of these Yes Bank bonds is adjusted in the net asset value (NAV) of the funds. The fund house is expected to reassess the portfolio as clarity emerges on the actual recovery of these bonds from the bank. The duration of this freeze will depend on how quickly the valuation and legal implications are finalized.