 "Redeem money over time from risky schemes")
It isn’t often that investors face a tortuous situation of being unable to exit an open-end debt scheme, despite knowing that it holds papers of companies that are likely to default. Though mutual funds use the caveat in their offer documents that they can restrict redemption in cases like extreme volatility in markets, political, economic or monetary events, JPMorgan Asset Management’s decision to implement it on August 28 came as a shock to many investors.
The fund house has restricted redemption to one per cent per day in two schemes – India Treasury Fund and India Short-Term Income Fund, which are longer-term liquid funds. The reason: One of its holdings, Amtek Auto, was downgraded recently leading to erosion in returns.
While there is little investors can do now because their exit has been restricted, the good news is that Amtek Auto has not still defaulted. But it is certainly a blow from such debt schemes because liquidity is one of the unique selling propositions for such schemes.
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There is a lesson from investors here. According to the CEO of one of the top five fund houses, investors should also look at fund houses, which have the ability to absorb such losses. Bigger fund houses can take the losses on their books and then, get the money back from the company in the future. So, even if they hold riskier papers to give better returns, they have the ability to absorb the risk, he says.
A case in point: In 2008, when a leading realty company defaulted, two top fund houses absorbed as much as Rs 500 crore of losses. “Either the risk-taking fund house should have a strong book or they should stick to top-rated papers,” says the CEO. Adds Kumar: “I don’t see any reason why fund managers should put money in papers, which are giving just 25-50 basis points more.”
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Vidya Bala, head of mutual fund research at Fundsindia.com, says presently the loss for an investor is just on paper after the scheme adjusted returns as per mark-to-market criteria. But investors should start the exiting process irrespective of whether the fund house will get its money back or not. They can move the money to another debt fund where the paper quality is high and thereby lower risk factor.
Investment advisors say usually in such cases, investors should look at the scheme's exposure to the company to take a call. If the exposure is significant – over five per cent - the chances of capital loss could be higher. The Rs 2,534-crore India Treasury Fund had allocated 5.29 per cent (or Rs 134 crore) of its assets to Amtek Auto's issuance papers, while the Rs 430-crore India Short-Term Income Fund infused a whopping 15.37 per cent (or Rs 66 crore) in the same instrument. Hemant Rustagi, CEO of Wiseinvest Advisors, says some investors, who have low exposure to the fund compared to their overall portfolio, can still give the fund manager time to redesign the portfolio. “It may work in their favour. Decisions should not be made in panic,” says Rustagi.
The fund house has restricted redemption to one per cent per day in two schemes – India Treasury Fund and India Short-Term Income Fund, which are longer-term liquid funds. The reason: One of its holdings, Amtek Auto, was downgraded recently leading to erosion in returns.
While there is little investors can do now because their exit has been restricted, the good news is that Amtek Auto has not still defaulted. But it is certainly a blow from such debt schemes because liquidity is one of the unique selling propositions for such schemes.
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Says Dhirendra Kumar, CEO, Value Research: “There is an underlying flaw in them because investors are provided unfettered liquidity while the underlying assets are not so liquid. Investors should withdraw money from such schemes and put them in liquid funds where the underlying assets are shorter in nature.”
ALSO READ: Mutual Funds turn net buyers for 16 straight months
There is a lesson from investors here. According to the CEO of one of the top five fund houses, investors should also look at fund houses, which have the ability to absorb such losses. Bigger fund houses can take the losses on their books and then, get the money back from the company in the future. So, even if they hold riskier papers to give better returns, they have the ability to absorb the risk, he says.
A case in point: In 2008, when a leading realty company defaulted, two top fund houses absorbed as much as Rs 500 crore of losses. “Either the risk-taking fund house should have a strong book or they should stick to top-rated papers,” says the CEO. Adds Kumar: “I don’t see any reason why fund managers should put money in papers, which are giving just 25-50 basis points more.”
ALSO READ: Things to know before redeeming your mutual fund investment
Vidya Bala, head of mutual fund research at Fundsindia.com, says presently the loss for an investor is just on paper after the scheme adjusted returns as per mark-to-market criteria. But investors should start the exiting process irrespective of whether the fund house will get its money back or not. They can move the money to another debt fund where the paper quality is high and thereby lower risk factor.
Investment advisors say usually in such cases, investors should look at the scheme's exposure to the company to take a call. If the exposure is significant – over five per cent - the chances of capital loss could be higher. The Rs 2,534-crore India Treasury Fund had allocated 5.29 per cent (or Rs 134 crore) of its assets to Amtek Auto's issuance papers, while the Rs 430-crore India Short-Term Income Fund infused a whopping 15.37 per cent (or Rs 66 crore) in the same instrument. Hemant Rustagi, CEO of Wiseinvest Advisors, says some investors, who have low exposure to the fund compared to their overall portfolio, can still give the fund manager time to redesign the portfolio. “It may work in their favour. Decisions should not be made in panic,” says Rustagi.