Impact 
After learning from sinking many investors’ fund-ships, fund managers of debt mutual fund houses seem to be turning over a new leaf. Earlier, they chased higher yields on corporate bonds of troubled companies, as well as took on exposure to corporate debt with poor asset quality. However, the fiasco of Amtek Auto and JSPL has opened their eyes. Now, going by the Financial Stability Report released by RBI reveals, the mutual fund houses have gone slow on investing in downgraded debt. Once bitten, twice shy; so as mutual funds now shy away from high-leveraged companies.
As per the report, exposure of mutual funds to the downgraded debt increased only 20 basis points (bps) (0.2 percentage points), from 1.6% in September 2015 to 1.8% in March 2016. Over the same time, overall exposure of mutual funds to corporate debt jumped 4.0% from Rs 2.46 lakh crore in September 2015 to Rs 2.55 lakh crore in March 2016. This suggests that the fund houses have increased their exposure to corporate bonds with better asset quality.
In the case of Amtek Auto, even the so-called independent credit rating agencies missed the sharply falling debt servicing ability of the company. Mutual funds learned a lesson the hard way because of this. It seems they have tightened their internal risk controls and have been following better risk management practices.
Apart from the risk averseness demonstrated by fund managers, there are a few more factors that have resulted in the fall in the exposure of mutual funds to the downgraded debt. These are listed below:
- The securities and Exchange Board of India (SEBI) introduced prudential exposure norms for mutual funds to cap their single security and a single sector exposure.
- Broadly, the corporate balance sheets have shown improvements in H2, FY 2015-16, as the RBI Financial Stability Report revealed
PersonalFN is of the view that, although generating superior returns is what you always target, you should be wary of risks involved in a particular investment proposition. PersonalFN believes, you should thoroughly check the performance of debt funds on a risk-adjusted basis, before investing in them. You see, debt funds are not risk-free. They are exposed to various risks such as credit risks, interest rate risks, and reinvestment risks among others.
PersonalFN has been internally following a practice of evaluating debt funds on their portfolio characteristics as well, besides on the returns and consistency in returns. Debt Select is PersonalFN’s unbiased report with coverage on the most suitable and potentially rewarding debt funds.
Impact
Your most favourite e-tailers may offer you attractive discounts on any product. However, many of them will soon start offering a new product category on which they might never offer you any discount. After all, no mutual fund house will allow e-tailers to market their schemes at a discounted NAV (Net Asset Value). You are probably wondering which online shopping portal sells mutual funds? Well, at present there may not be any e-commerce website selling mutual fund schemes, but soon there could be many such e-tailers offering you mutual fund products.
SEBI is planning to allow mutual fund houses to use e-commerce platform to promote their products and extend their reach to potential investors. The Capital market regulator had set up a panel on digitalisation of financial services headed by, Infosys co-founder, Mr Nandan Nilekani. The committee has submitted its report based on which SEBI is now planning to take such action.
The intent behind doing so is simple—the capital market regulator thinks the popularity of e-commerce websites may help to create awareness about mutual funds among masses. To begin with, SEBI is going to allow only a few online shopping websites to sell mutual fund schemes that meet the minimum sales and net worth criteria. After sales service record, brand popularity, and the customer base are a few other criteria.
PersonalFN is of the view that, while there’s no harm in allowing e-commerce website to sell mutual fund schemes, there isn’t any substitute to educating investors. Unless investors know at least a few fundamentals of mutual funds, it is very unlikely that they will be able to select the right scheme for themselves. This would be akin to providing sophisticated electronic gadgets to a person who doesn’t know anything about them.
There’s one more contradiction, if SEBI wants to improve the investors’ awareness about mutual funds using the popularity of online shopping portals, it shouldn’t insist on minimum net worth and sales criteria. Customer base and reputation of e-commerce websites speak for themselves. People tend to shop repeatedly only from the websites that offer them good products and satisfactory after-sales service. However, it appears that the SEBI wants smaller businesses to shut shops. It raised the minimum net worth criteria for mutual funds a few years ago, and now it’s setting similar parameters for e-commerce websites. What’s more, these websites are going to play the role of facilitators and ultimately, they would be selling third party products. Only SEBI can explain why it is insisting on minimum sales and net worth criteria.
PersonalFN is of the view that, trying too many things without getting into the nitty-gritty can prove to be a futile exercise. More than a lack of awareness, there’s a trust deficit among investors. Only SEBI can tell us which platform can bridge the trust deficit. PersonalFN has been working relentlessly in an unbiased way to make investors smart and responsible when it comes to investing and managing their personal finances.
Impact
Ending decades of a relationship, Britain finally decided to divorce the European Union (EU). Fearing the consequences of this development, capital markets across the globe crashed on the day of the result of the referendum. The English citizens’ decision poses a grave threat to the existence of integrated Europe. Pound nosedived against US$ to a level not seen since 1985. However, gold staged a smart rally. As the risk aversion kicked in, investors chased the safe havens of gold.
Will Gold Rally Further?
Data as on June 24, 2016
(Source: ACE MF, PersonalFN Research)
Why investors prefer gold during uncertainties?
As you might be aware, gold prices increase in sustained phases of economic downturns or when there’s a huge risk to the political stability of a country or a region. During economic downturns, inflation-adjusted interest rates slip in the negative causing erosion of investors’ wealth. The gold maintains its purchasing power in such phases. For this reason, investment demand for gold goes up. On the other hand, geopolitical tensions create an unstable environment for businesses and pushes stock prices down. Moreover, geopolitical tensions often hamper the economic progress of the affected geographies or even the whole world sometimes depending on the severity. This is why the money which flows out of risky assets such as stocks and crude oil among others, takes refuge under the safe havens of gold.
To ready more about this story and Personal FN’s views over it, please click here.
Impact
If you type “Brexit” in Google, the search engine throws up 14.4 crore results. This might be enough to give you some idea of how widely the event of the UK exiting the European Union (EU) is being discussed.
Results of the British referendum | Choices | Votes | | The country should "Leave" the European Union | 51.90% | | The country should "Remain" the European Union | 48.10% |
(Source: BBC)
It’s natural for people around the globe to track the Brexit as it is bound to cause disruptions in the global economy. Britain’s exit endangers the existence of integrated Europe. Europe was not merely a club of 28 countries but was a powerful union integrating countries, people, cultures, and businesses. If it disintegrates, trade and political equations might change permanently. Whenever such events happen, the first impact is felt on the currencies of affected nations as investors flee from troubled territories.
Indian currency has remained stable | Currency | Change against US$
after Brexit | | Japanese Yen | 3.19% | | Brazilian Real | 1.03% | | Indian Rupee | -0.64% | | Russian Rubble | -0.95% | | Chinese Yuan | -1.08% | | Turkish Lira | -1.75% | | Canadian Dollar | -1.94% | | Swiss Franc | -2.40% | | Euro | -2.81% | | Norwegian Krone | -3.83% | | Pound Sterling | -9.84% |
Data as on June 28, 2016
(Source: Bloomberg.com)
As the table above shows, Pound Sterling has depreciated 9.84% since the Britain decided to exit EU. The other European nations felt the repercussions of the event and their currencies too depreciated. In comparison, Indian Rupee has remained resilient and has declined by just 0.64%.
To ready more about this story and Personal FN’s views over it, please click here.
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Mutual Fund houses are relentless in launching NFOs (new fund offers), as much as we are, at PersonalFN, of criticising their opportunistic approach. Mutual fund houses have so far filed nearly 50 proposals with SEBI in 2016 for launching NFOs across categories. What’s more? This time, they are using more “Hindi” names in place of famous English names to attract more rural masses speaking local languages. Fund houses seem to be missing one important point here. Whether you call it a “Tax Savings Fund” or “Kar Bachat Yojana”, you can’t get away with poor performance. Mutual fund houses run their NFO factories in full swing when markets are strong. When the bear phases are set in, these babies born in the bull phases gasp for fresh air. At such times, mutual fund houses intelligently promote their evergreen schemes.
Unlike Government employees, who call for a strike to get their demands approved, we, at PersonalFN, demand a strike at the NFO factories of mutual fund houses for the wellbeing of investors.
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