During October, the Indian mutual fund industry narrowly averted a systemic meltdown of its debt funds. Investors were redeeming their investments in large amounts, and the fund companies were running out of ready cash to honour these redemptions. The root cause of the problem was very simple. The fund companies were running debt funds of various types from which investors could withdraw money at any time. However, investors’ funds were invested in bonds that weren’t easy to redeem quickly. Most such funds kept some part of the assets in instruments that should have been easy to sell quickly. However, when the crisis broke, the normal definition of ‘easy to sell’ also broke down. As businesses started panicking, the volume of redemptions also rose way above normal.
In this exclusive interview, the debt fund manager of a large mutual fund house spoke to Dhirendra Kumar, CEO, Value Research about what was happening and how things were managed. The fund manager spoke with complete frankness and honesty–something that isn’t normally possible for someone in his position. In exchange, we’ve promised to keep his identity a secret.
Have you ever witnessed such a crisis in your entire professional life?
Over the last twelve years, we have seen all kinds of crisis. In all those periods we have survived. We have seen call money market move from 0 per cent to 100 per cent. We have seen our fund size coming down by 60-70 per cent in March, yet we consistently survived year after year. There was one difference though. They were predictable and we were able to gear up for it.
This time when the systemic liquidity disappeared, it caught our portfolio managers unaware. We were not prepared for the six sigma event. The liquidity crisis was genuine. We had three month to five month maturity portfolios, but our investors could have taken the money out probably on a daily basis. Was this an error? Yes. Could we have predicted this? The answer is no.
First it was a crisis of liquidity. Then, it became a crisis of confidence. The latter hurt more than the former. Without any basis, people were writing reports that mutual funds are going to default. However, because of the regulator’s support and the systems’ support we have all survived and no mutual fund has defaulted on any obligations.
When did you realise that you were being hit by a crisis?
Probably around the end of September. Despite advance tax payments ending on September 15, redemptions continued. By the end of September our cash balances started dwindling and it hit us that we were in a crisis.
What did you do?