Mutual fund disaster

by April 27, 2020 0 comments

Franklin Templeton closing six schemes is indeed a matter of great concern. People’s confidence needs to be built

Every few weeks, rating agencies send out emails, classifying companies, countries and even mutual funds on the basis of their performances. We have always been told that while some types of mutual funds could be risky investments, on the whole, they are safer than investing in equity markets. After all, fund managers are qualified individuals, experts in investing and not just some ordinary punters. Yet, when fund house Franklin Templeton voluntarily wrapped up six debt schemes, it sent shockwaves through the market. The fund house blamed the prevailing market conditions due to the spread of the COVID-19 pandemic and the resultant lockdown, which have impacted the liquidity market for corporate bonds. This essentially adds yet another headache to the growing list of concerns for regulators and the Finance Ministry.

Solving this crisis may also not be as easy, as former Finance Minister P Chidambaram suggested. While all the funds were invested in bonds issued by companies that had a higher risk profile, for example several non-banking finance companies, it seems almost ridiculous that a fund house could put its hands up and walk away from a mess. While Franklin Templeton is not to be blamed for the present crisis, it should have stayed in the game. Almost every investor expects to lose significant amounts of money on the equity and mutual funds markets this year. Even well-run mutual funds have seen their values drop significantly in the past few weeks. Yes, investing in riskier companies carries a higher reward even at the cost of significant risk, but winding down the schemes has put close to Rs 30,000 crore of investor funds at risk. While the Government can explore some solutions as suggested by Chidambaram, the fund house responsible for the mess has to pay a price as well. In addition, while the closure will impact the investor, there is a high risk that this failure will hit the mutual fund industry as a whole. Post this event, if too many investors exit, this would worsen market conditions. It will become even more difficult for unit holders to either liquidate schemes or recover value. This is why investors need to do a thorough research before investing. For example, when it comes to debt funds, fixed income investors can choose fund houses which have a strong track record. It is also time for them to take a look at their overall mutual fund portfolio in line with their risk profile. Some experts have also suggested that investors in the fixed income space, ones with higher allocation to credit funds or lower-rated paper, can shift overnight to liquid and arbitrage funds to lower their exposure risk in the current environment. With investors already spooked by losses, the winding up of schemes by a reputed fund house will make mutual funds toxic for them once the lockdown lifts and the economy regains some semblance of normalcy. But as we all know, that day might be further away than we would expect. This is a chicken and egg situation for the Government to get confidence of the people, who rely on such schemes for their future financial needs, back as the system is currently broken. Everyone is being relatively obedient but if losses pile up for companies, investors and the public at large, anger might spill over. Apart from a stimulus package, the Government can perhaps direct liquidity towards mutual funds at cheaper rates so that they can meet growing redemption pressure.

(Courtesy: The Pioneer)

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