Regulator Does Its Job,
What About Fund Houses?
T
he ethical is always more robust than the legal.
Over time, it is the legal that should converge to
the ethical, never the reverse," wrote Nassim
Nicholas Taleb, author, Skin in the Game. The
recent event in the domestic mutual fund industry shows that the
reverse is happening and it is the legal that is forcing the fund
houses to be ethical. It is the regulator that is interfering to set the
house in order and introducing rules that should have been set
and followed by the fund houses on their own in the interest of
investors.
In its recent meeting, the Securities and Exchange Board of India
(SEBI) has introduced some far-reaching changes in debt mutual
funds. For example, in the case of liquid funds, it has been
mandated that the funds should hold at least 20% of their corpus
in liquid assets, such as cash, government securities, T -bills and
repo on government securities. Also, other changes were
introduced pertaining to debt funds, keeping the investors'
interest in mind. These changes were necessitated in the wake of
recent credit events that have shaken the investors' confidence in
debt mutual funds. One of the fund houses tried its best to gain
confidence of the investors, but the effort was too late and too
little.
The fund houses, in order to increase their assets under
management (AUMs), invested in instruments that defeated the
very purpose of investors' selection of that category of funds. An
investor invests in debt funds not for higher returns, but for stable
returns and liquidity. Some of the fund houses, however, invested
in instruments such as structured obligations, which turned out
to be more risky and hence not suitable for investment under
such category. Moreover, once the beans were spilled, the fund
houses chose to resolve the issue by means that suited them best
and not by what was laid down by the law or what was in the best
interest of the investors.
The steps taken by SEBI are likely to bring down the expected
return of these categories of funds. Nonetheless, investors who
invest in debt funds, liquidity and safety is far more important
than the returns.
SHASHIKANT
MF Page - 01
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Vol. 34. No. 16 • JULY 8 - 21, 2019 http://www.dsij.in/apps.aspx
Content
Cover Story
2
MF Page
Multi-Cap Funds vs Large-Cap,
Mid-Cap and Small-Cap Funds
Special Report
8
MF Page
How to Review Your
MF Portfolio?
MF Select 12
MF Page
Financial Planning
7
MF Page
Debt Mutual Fund Schemes:
All Kinds Of Risks Playing Out?
I read a report that states there will be bigger defaults by IL&FS
in October 2019, which would be to the tune of 91,000 crore. I
want to know what will its effect be on MFs? Will there be
dividends?
- H Chandra Gupta
Editor Responds: The figure you are quoting is the group's total
debt as of the end of October 2018, which will become overdue to
different lenders over the period. The government has already
appointed a new board that is trying to resolve the issue in a way
that will have minimal impact on the financial markets.
Funds that have invested in IL&FS papers will definitely get
adversely impacted. Dividend by a fund house is never guaranteed
and are not fixed returns and hence it depends solely on the fund
house, whether they want to distribute dividends.
Bigger Default
DSIJ.in (^) JULY 8 - 21, 2019 I DALAL STREET INVESTMENT JOURNAL (^6767)