Mutual fund investments to get safer

Mon, 2 Nov Pre-Open

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Investors have a natural tendency for safety when it comes to investing. After all, they are parting with their hard-earned money. To most people, the return of capital is very often as important as the return on capital. Thus, many tend to stick with safe bank fixed deposits. But what about other options?

People consider equities risky. We know it's not as simple as that. However, we do recognise that when it comes to safety of principal, debt usually trumps equity. This is the reason why debt markets around the world are larger than equity markets. We see this in the Indian mutual fund industry too.

The total AUM in debt funds is higher than the AUM in equity funds. Most of these debt funds invest in safe commercial paper or government bonds. It's no wonder people think they are as safe as bank deposits.

Unfortunately, that is not true. The recent fiasco in JP Morgan AMC is a case in point. Concentrated investments in the debt of Amtek Auto ended badly when the company was unable to repay. In a recent issue of the 5 Minute WrapUp, we presented our view on the Amtek Auto saga.

JP Morgan AMC had restricted redemptions during this time. It also passed on the loss to investors. This came as a rude shock. Although the AMC did not break any rules, SEBI has decided to step in. The market regulator, as per an article in the economic Times, is reviewing the rules and circumstances in which AMCs can take such decisions.

Further, new investment limits for fund managers are also on the cards. SEBI could curtail mutual fund's sector and stock exposures. In addition, a new cap on exposure towards a business group could also come into effect. These moves could help prevent a repeat of such a fiasco.

We believe such a move would be in the interest of retail investors. The growth in AUM of the industry has been sharp recently. Thus, in absolute terms, specific investments made into a particular stock or debt paper has also grown in size over time. This does increase the likely-hood of mutual funds facing liquidity pressures.

As long as, a fund manager's flexibility is not hampered by the new rules, it will be a step in the right direction. We view this as another instance of the SEBI stepping up for the retail investor. Hopefully, we can look forward to a higher level of safety in mutual fund investments going forward.