The New MF Paradigm

Forbes India|July 3,2020

The New MF Paradigm
Why the pandemic-induced volatility is a wake-up call to ensure measured and diversified asset allocation, and relook portfolios
MONICA BATHIJA

About five months ago, the founders of Agile Connects, an Internet of Things startup, put the entire corpus they had raised recently for business expansion plans into the Franklin Templeton Ultra Short Bond Fund. But on April 23, Franklin Templeton announced a closure of the fund along with five others on account of liquidity issues in the debt papers they were holding; Agile has been left with no option but to wait. The company, which thought the funds were safe and liquid, finds itself in a hard spot as it has reserves that will only last a couple of months.

“If the money is stuck for the next three years, it impacts our planning ability. Right now we have raised some invoices with our clients to pay salaries and other overheads, but if that money doesn’t come we are looking at a challenging time ahead even to pay salaries,” says Arvind Khungar, chief strategy officer at Agile Connects.

As investors continue to grapple with the effects of the pandemic, and the financial crisis and volatile markets accompanying it, it’s a wake-up call as good as any to ensure measured and diversified asset allocation, and relook portfolios.

After a massive outflow of ₹19,239 crore in April from credit risk funds, the panic seems to have abated for now; the outflow slowed to ₹5,173 crore in May, according to the Association of Mutual Funds in India (Amfi). [Credit-risk funds typically invest in lower-rated securities (below AA-) and gained in popularity because of their potential for double-digit yields]. The data also shows that investors have moved to categories with low credit risk, allocating more to banking and public sector debt, gilt and liquid funds. Flows into debt mutual funds rose to ₹63,665 crore in May from ₹43,431crore in April.

“Earlier, debt funds were equal to fixed deposits for a section of investors, they conflated the two things,” says Anish Teli, managing partner and fund manager at QED Capital Advisors. “Now at least people are asking questions, they know there’s a credit risk, and there is an interest rate risk, and they do not want to get stuck in a credit risk situation.”

The problems with fixed-income funds are not new. There have been a few shocks in recent times, starting with the IL&FS crisis in September 2018, followed by mutual fund investments in the papers of Dewan Housing Finance Ltd, Yes Bank Ltd and the Essel Group companies going bad. April saw the peaking of that risk aversion.

“In between a lot of things were done by (market regulator) Sebi, which were good for investors. But, at the same time, they brought all the risk to the forefront, it became visible,” says Dhirendra Kumar, CEO of Value Research, an independent financial advisory firm.

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July 3,2020