Getting it right with debt mutual funds

I remember a conversation with a market participant in the wake of the series of adverse events that rocked the debt market segment of mutual funds over the last several months. She opined that she would much rather invest in equity, which eventually gives good returns, than in ‘risky’ debt.

I also remember a more recent tele-conversation with the head of an AMC who opined that while the regulator was earlier inclined to make announcements and expect it to be followed in letter and spirit, it has now shifted to more of a proactive approach by spelling out the do’s and don’t’s.

Three years ago when SEBI categorised funds, the idea seemed a good one in principle. Its focus then, as that of most market participants back then, was on equity funds and while the categorisation per se was just about satisfactory, the universe of what comprised mid-caps and small-caps for the purposes of fund allocation raised several eyebrows. Instead of correcting that obvious fault line, a recent iteration about a certain category of funds that followed only seems to have compounded the problem. Hopefully, better sense might prevail on that front, post industry representations.

Against such a backdrop, the idea of the regulator to introduce a stringent Risk-o-meter for debt funds seems to be a step in the right direction. Mind you, this has come after a series of debacles in the debt mutual fund space that first led to the concept of side-pocketing and culminated in the unprecedented move by an AMC of international standing to unilaterally shut down its schemes and literally leave its investors holding the bucket. Seemingly having been blind-sided by the actions of the Fund Manager of the above-mentioned AMC just like its investors were, SEBI would do well to ensure that unit holders do not get short-changed and every rupee owed is repaid.

Getting back to the Risk-o-meter, three years ago when SEBI came up with its categorisation of funds, it missed categorically defining the quantum of duration risk a credit risk fund can take, as also the quantum of credit risk that a duration fund can take. Now, post a series of mishaps where investors got badly bruised, the regulator has prescribed affixing a numerical risk value to liquidity risk, credit risk, and interest rate risk of a debt mutual fund’s security holding.

The regulator has also asked fund houses to revise the Risk-o-meters of their schemes on a monthly basis and disclose it on their website from January 2021. The change this entails is that even within the same debt fund category, two different schemes can have different risk levels based on the instruments they hold. This is expected to be useful in determining suitability of a fund based on the risk appetite of an investor. Will this lower the risk of all debt funds ? Perhaps not, but a simple risk rating number affixed to it could at least improve transparency and help some investors calibrate their risks. 

Ashok Kumar
heads LKW-India.  He can be  reached at  ceolotus@hotmail.com