An auto ancillary company's credit rating downgrade caused a fund house to take a partial write down last week in schemes that have an exposure to this company. This credit event has started a whole set of "Chinese whispers" as Mr.Bond calls them, which he strongly believes does more harm than good for the industry. He makes a strong case for the industry to desist from rumour and scare mongering and asks advisors to think calmly before rushing to advise clients to exit from credit play oriented accrual funds, only because of one credit event. It is time he says for advisors to sift facts from rumours and stick to communicating facts. It is equally time says Mr. Bond, for fund houses to remind themselves about the real mandate that investors give them in accrual funds - which is to beat FD returns post tax, but avoid competitive pressures that make them take one risk too many in their schemes.

We saw one bad news last Monday when equity markets corrected on Chinese & global cues. Industry is just getting back on its feet when another news - now on debt side has surfaced. Without getting into details of the whole situation, suffice it to say that though it is one off kind of a situation; to panic & have knee jerk reaction is not in the best interests of the Mutual Fund Industry. Many rumors, Chinese whispers with added mirch masala will do the rounds for some time to come. As informed Advisors it becomes our duty & responsibility in not adding fuel to fire & escalate the situation.

Not the first credit event - and not the last either

Storm in a Tea Cup is being projected as a full blown tornado. There have been defaults, delays on repayments of debt securities in the past as well. Our MF Industry has handled all these situations professionally & efficiently. I have every reason to believe that we will come out unscathed from the current situation as well.

One delay/default in the debt space does not warrant us to assume that all credit play is bad & start redeeming out of credit play debt schemes. We need to hand hold our investors during this period & guide them through these trying times. Investments in credit calls will have some illiquidity attached to it. It still does not take away their space in our investors' portfolios. However, without understanding the implications, if we give unnecessary disinvestment call from these schemes; investor's perception will change towards these investments & will redeem out of sheer panic. This will create a situation similar to 2008 Lehman Brother crisis when the Fund Managers had to sell even the highest rated credits at huge losses just to meet the redemption pressures.

Stick to facts

Let us communicate only factual things (as & when asked by the investors), keep things to the point till the whole issue resolves itself & move forward. Unnecessary, unsolicited advice & communications will only enhance perception risks of these schemes without any merit in the same.

Communicate positive side of this whole fallout. Let us turn this adversity into strength of our industry by demonstrating that even after such a huge negative on the NAV of one of the short term plans (which had exposure to this security where there is likelihood of delay in repayments); the said scheme has generated following positive returns over past 1-2-3 year periods:

1 Year      6.06% p.a.

2 Years      7.96% p.a.

3 Years      7.98% p.a.

As against the above, one of the 10 Year benchmark G Sec Fund has delivered 7.02% p.a. over past 3 years with no credit call. Hence, to become judgmental on one strategy v/s the other is not the right way to look at current crisis. All strategies have their pros & cons & they will pan out at some points in time or the other. All strategies will have their own space in client portfolios with their own merits & demerits.

This credit event in fact highlights the virtues of debt funds

Other positive side of this whole story is the benefit of DIVERSIFICATION in the MF schemes v/s single issuer risks borne by the investor. Imagine if investors had invested in FD or NCD of the said issuer in question, they would have faced the risk of losing their entire investment (returns on the same does not even come into the equation). As against that, due to diversification of risk over various issuers in any debt schemes of MFs, investors will not only earn returns on their investments as mentioned above but will also have the benefit of liquidity by redeeming out of any such schemes (which are impacted due to default of one of the issuers). Even assuming that investors suffer some loss (those who may have invested in the recent past) will still have majority of their principal intact with full available liquidity.

We need to highlight these aspects of investments in MF schemes v/s investments in other traditional instruments like FDs or NCDs of Companies (which forms a major part of any investor portfolio). Let us spread positive side of the whole story instead of resorting to blame game, one upmanship & unnecessary conversations of "I told you so…"

Wake up call for fund houses

Also, this will be a wakeup call for the industry as a whole. Such instances have happened in the recent past as well. We are straying away from the basic mandate given by the investors who come to invest through the MF route by leaving the traditional routes. Investors were happy with 6% post tax returns in their FDs (9% less 30% tax). We are trying to promise them unsustainable returns which can be possible only when we take huge credit calls or if the interest rate movement goes in their favor. Investors come to invest in debt schemes (as alternate to FDs) for safety of principal, predictability & regular cash flows.

Also, in our Industry Accrual is treated as synonymous with Credit Play. Why? Why can't we have accruals from AAA rated securities? We cannot become part of the greed of investors. Same applies to Fund Managers who cannot afford to get swayed by greed of Advisors or their sales teams for higher yields & throw caution to the winds by taking undue credit calls.

Let better sense prevail

Let us get sanity back to the system. Let us temper the expectations of the investors to more realistic levels of returns. We should aim to achieve FD + returns both on pretax & post tax basis. Debt schemes in MF have a distinct tax advantage for holding period beyond 3 years. Let us capitalize on that. Remember, our biggest competition was & is 3-10 year FDs. 1 year FDs were never the preferred investment vehicles of retail investors. Hence, to convince them to get into 3-5 year debt schemes with reasonable quality of papers should not be a difficult task at all.

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