To bring back investors’ faith in debt funds, the MF industry needs to communicate risks in debt schemes better. In the past, the industry’s communication has been lopsided with the focus on returns or flows in debt funds and this needs to change, feels Amit Tripathi, CIO-Fixed Income Investments, Nippon India MF.
At Cafemutual Confluence 2020 Investment Marathon, Amit took us through the key factors that led to the recent events in debt funds. He also suggested some possible solutions to regain investor confidence in debt funds.
What went wrong?
Amit said that there was a gap in fund strategies vis a vis the risk appetite of investors. Consequently, it led to chasing illiquid debt papers in the last couple of years. And because this happened in a growing AUM scenario, fund managers failed to see the true picture of illiquidity despite the best intentions and strcuturing.
Further, Amit said that the events in debt funds were not because of investment in low credit papers necessarily but rather in the illiquidity of portfolios in a thin market. While there were very few credit defaults at an industry level, consequent redemption pressure from investors prompted fund managers to sell the most liquid securities and that further increased the proportion of illiquid securities in the scheme.
Some of the debt funds invested in illiquid papers being aware of the challenges, as they banked on the market's ability to refinance these papers. However, an economic slowdown followed by the pandemic significantly affected risk appetite in the system and turned the tide against them, Amit explained.
Way out
To ensure that similar events do not occur again, Amit suggested fund casing as a possible solution. Fund casing means defining boundaries in terms of taking risks involved in debt securities in each respective scheme. There should be complete discipline in adhering to the mandate of the fund. Amit explained that even as fund managers have the ability to deploy a whole range of strategies, they must stick only to the respective mandates at individual scheme levels.
Further FMs should try to bring as much visibility as possible on the construct and strategy in individual debt schemes. For example, in recent times some fund houses have adopted a roll down strategy in select open ended debt funds. In this strategy, fund managers create a portfolio around a certain preferred maturity bucket and allows the portfolio to roll down. This helps these open ended debt funds deliver higher predictability vis a vis a plain vanilla open ended scheme strategy.
Amit’s last suggestion is to ‘communicate, communicate and communicate’ the risks involved in the portfolio and the environment in which debt funds operate. And not limiting the communication to flows and returns in debt funds.
