Sunita Abraham asks experts if investors staying put in debt fund, even when they have the choice to exit, encourages fund managers to ignore risks in the search for higher returns
Most investors vote with their feet and express their opinion of fund management choices by remaining invested or moving their money out. So, have investors given debt fund managers a tacit go-ahead to take greater risks by countenancing the poor choices and decisions that the fund managers have made in the recent past? Sunita Abraham asks experts if investors staying put in such a fund, even when they have the choice to exit, encourages fund managers to ignore risks in the search for higher returns.
Investors are staying back in hope of saving value of holding
The investors’ decision to stay on in a fund may have more to do with the need to preserve the value of one’s holding and may not be about endorsing the fund manager. There’s hope that funds will be able to recover the value of the papers that are currently in default. In case investors opted to exit, the value in proportion to the defaulting paper would have been lost forever.
What is equally important is to see what percentage of investors opted to continue in the scheme and not necessarily what percentage of the assets under management (AUM) has stayed back.
As a significant portion of the debt funds are held by institutional and high net worth investors, AUM retention may not give the correct or complete picture to say that the fund manager enjoys the endorsement of the investors.
Lastly, we need to be cognizant of the fact that these defaults got triggered by a series of events which may not have been foreseen at the time of making investments.
Arvind Chari, head, fixed income and alternatives, Quantum Advisors
There’s no validation of fund manager’s risk-taking
Debt funds are going through testing times. That a liquid fund or even a fixed maturity plan can lose an entire year’s expected return due to one event or one wrong investment call is not what investors seem to have been aware of or prepared for.
Today, we may be seeing many investors staying put after a credit default, hoping to recoup their losses eventually after having seen a write-down in the net asset value (NAV). It could also be driven by high exit loads or lock-ins.
I don’t think with any of the above, investors are implying that the fund manager can take on more risk. We have seen investors redeeming in droves when hit by negative performance on long duration funds which implies that they were unhappy with the risks that the fund manager took and actively chose to redeem. Post just one event of default, few fund houses have shut down or have been taken over. So, mutual funds would be wise enough to not take the investors’ passiveness of choosing to stay invested as any form of validation of the fund managers’ (undue in certain cases) risk-taking.
Munish Randev, family office advisor
Advisors and distributors play key role in debt investment
Very few investors have the understanding and, hence, the capability of assessing risk. Also, very few distributors really focus on credit and sector risks in debt portfolios. Asking questions to the fund manager is usually the domain of large distributors or advisors. While advisors have to carry a fiduciary responsibility, distributors may not.
Retail and mass affluent clients go purely by what is showcased and pushed by the intermediaries. While some distributors do have stringent fund appraisal processes, most others have very rudimentary set-ups where they use returns and few ratios. Many ultra HNIs and family offices do have the expertise (either internally or via advisors) to look at each security held.
Fund managers, on their part, are in a constant competition with peers to maximise gross yields.
Lastly, even for knowledgeable and active investors, the current taxation regime has made it difficult to exit before three years at which point long-term capital gains tax kicks in. It’s a trade-off between paying short-term capital gains tax or a possible default in one or more fund holdings.
Srikanth Meenakshi, founder and chief operating officer, Fundsindia.com
It is difficult for retail investors to analyse debt fund portfolios
Assets under management (AUMs) for several debt funds have been falling since last September. But this is driven by institutional investors who are savvier. Retail investors don’t have the same capacity to judge the risk and the impact, even when the risk materialises. This forces them to remain invested.
Knowing debt fund risk requires understanding each security in a portfolio. Moreover, it is an ongoing effort as portfolios change. This is hardly a feasible exercise for investors, and fund houses don’t provide such details to investors.
Also, the troubles unfolding in debt funds are new; there’s no precedent. The opacity of structures and practical difficulties in enforcing securities and covenants are only just coming to light. Each issue that debt funds face today is of a different nature and different funds are coming under pressure. Switching from one fund to another does not guarantee isolation from troubles.
Given all this, it has been very difficult for an investor to know what a risky choice in a fund is, much less decide whether the fund manager was right or wrong in taking such a call.
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