Dalal Street Investment Journal - July 09, 2019

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

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