Sudden and unexpected winding up of 6 high-risk debt funds by Franklin India AMC not only weakened the confidence of investors but also raised many questions about the investment decision of the mutual fund industry.
When we advise our clients to invest in a mutual fund, the major point we highlight is the professional management and process-driven investment decisions.
But the question is where is the professional management and process which assesses the risk before taking the final investment decision.
Many experts believe that this is Franklin's problem only but it is not limited just to Franklin India. It is possible that Franklin India might have taken very high risk compared to others but we should also not forget that even liquid funds have given negative returns in the past.
Mutual fund investors have lost more than Rs 1 lakh crore in debt schemes in the last 2-3 years. Right from the IL&FS to Yes Bank, Vodafone, the problem is not showing sign of any relief. RBI's move to give liquidity of Rs. 50,000 crore to meet the redemption pressure is not the solution but a temporary relief.
When an investor puts his/her hard-earned money in liquid or short-term funds, he wants more of safety and a little bit over savings bank and fixed deposit interest.
But if such schemes give negative returns then it is difficult to hold the investors. I was really shocked when I saw that Franklin India Ultra Short-Term Bond Fund invested in 5 and 10-year maturity paper. My understanding is ultra-short-term funds can invest only in 3 to 6 months maturity papers.
As per the SEBI scheme characteristic, Ultra Short Duration fund can invest in debt and money market instruments such that Macaulay duration of the portfolio is 3 -6 months. Then how come a scheme can invest in private limited companies and for a duration of 5 to 10 years?
This needs to be investigated and justice should be done to lakhs of investors who have suffered losses in so-called safe schemes.
I urge SEBI that liquid, ultra-short, money market, floating rate, low duration, and short-term funds should be allowed to invest in quality papers only.
The same criteria should be set for hybrid funds such as MIP and equity savings funds. Investors in this category are low-risk takers and lower quality paper in debt should not be allowed in this category as well.
In debt funds, the role of research organisations such as ICRA and CRISIL is of utmost importance as everything starts from there only. SEBI should review their role and assess the quality of research reports they are giving.
I have a feeling that these research reports are managed by the corporates? Is it also possible that some deals happen under the table? SEBI should go deep into this otherwise investors will shift their money to insurance and banks.
AMC and fund managers' role also need to be investigated. The process of investment decisions should be made public. They should also be answerable for every default. A quarterly review of the default needs to be done by an expert panel of SEBI. AMC and fund managers should be penalised and the loss needs to be recovered from them if they are found guilty.
Many investors and distributors look at the ratings given by Value research, Money Control and Morning star, etc. and take investment decisions.
I agree that distributors should also look at the portfolio before advising but ratings by these sites influence the recommendation and investment decisions. They should be brought under the scrutiny of law so that they give ratings after due diligence.
I firmly believe that loss in debt is permanent but you can still recover it in equity if you have bought a good stock or fund.
The debt investment according to me is riskier than equity investment. SEBI needs to take it seriously and come up with strict guidelines to protect investors' interest. Damage due to the lockdown is not known, better SEBI awake early.
[The author is a Certified Financial Planner (CFP)]