Should MFs Join ICA To Safeguard Investors Against The DHFL Debt Mess?
Jul 18, 2019

Author: PersonalFN Content & Research Team

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Nothing seems to be working in favour of DHFL at present. After recording a substantial loss in Q4, FY 2019, DHFL is likely to be forced to restructure its debt. Mutual fund houses have a massive exposure to the DHFL debt; which is why they are keen to join the Inter-Creditor Agreement (ICA) initiated by banks. According to media reports, mutual funds want to ensure that before they are on board with the agreement, they get SEBI's go-ahead.

If you remember, the decision of HDFC Mutual Fund and Kotak Mutual Fund to sign standstill agreements with the Essel Group promoters hadn't gone down well with the capital market regulator. After all, it had resulted in a great disservice towards mutual fund investors, indeed. Mutual funds don't want to upset the market regulator again and thus are treading cautiously this time. In this regard, industry body AMFI (Association of Mutual Funds in India) is likely to coordinate with the market regulator seeking all the requisites.

A fund manager of a mutual fund house speaking to media on the condition of anonymity said, "We favour joining the ICA in principle. The recovery of money will be higher if DHFL survives as a going concern. However, the terms and conditions must be favourable to unit holders since we are custodians of unit holders' money. We also need a written assurance from SEBI that they have no objection to us joining the ICA. No such assurance has been received so far."

The question is should mutual funds join ICA?

Unlike banks, Mutual funds aren't in the business of lending; they are just managers of their investors' money. Hence, their joining ICA proposed by banks might appear slightly awkward.

However, if they can collectively clinch a deal that's as beneficial for mutual fund investors as it is for the bankers; it might boost the investors' confidence in debt funds again.

Since most of the mutual funds have either written off DHFL debt from their books or have created side-pockets, any recovery of amount will push the Net Asset Values (NAVs) up.

As you are aware, besides DHFL, IL&FS, Reliance ADAG Group companies, and Essel Group companies have given debt fund investors sleepless nights so far. How dexterously mutual fund houses recover investors' money now remains to be seen.

Please remember

  • You shouldn't invest in schemes only because they have outperformed their benchmarks in the recent past.

  • Consider your financial goalsrisk appetite, and time horizon before investing in any debt-oriented scheme.

  • Following your personalised asset allocation is the key.

  • Ideally, you should invest only in schemes that have a maturity profile matching your time horizon, to avoid negative surprises.

  • Last but not least, invest only in debt schemes offered by mutual fund houses which follow robust investment processes and have adequate risk management systems in place.

Undoubtedly, risks stem from weak finances of companies issuing debt; but risks also have their roots in the attitude of mutual fund houses. There's a thin line between arrogance and ignorance. Some fund houses are habitually assuming significant risks and taking their investors for granted. It's time for you, the investor, to realise the importance of carefully selecting mutual fund schemes.

[Download PersonalFN's Money Simplified Guide: 10 Steps to Select Winning Mutual Funds]

Until recently, most investors believed that ultra-short term funds and short duration funds were relatively safe. But with new episodes of corporate debt fiasco coming to fore, this assumption is worthless.

If debt schemes continue to accept fresh money, despite having exposure to stressed assets/borrowers, advisors and investors should avoid them at all costs; else it could hurt your financial wellbeing. A fund house and its fund managers should always act as prudent asset managers and do whatever is in the interest of investors, and not be in the race to garner more AUM.

At a time when the industry is struggling to find safe havens amidst the on-going debt crisis, accepting fresh investments indicates that the fund houses are interested only in growing their AUM.

It's noteworthy that not all fund houses are making bad investment decisions. The ones following robust investment processes and systems are better off. They don't stick their necks out and compromise on qualitative aspects such as corporate governance to accomplish their investment objectives. Select and invest in schemes from such mutual fund houses.

It's time for mutual fund houses to seriously take up the mantle of responsibility of their investors' interest, stop borrowing trouble, and safeguard their hard-earned money.



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