Are Mutual Funds Really Worth a Risk for Long Term?

siddhant4u

Well-Unknown Member
#11
ST sir is saying that most of the money could get refunded in 4 months itself and it would not take 2-3 years as mentioned by some other members here. Let us hope ST sir calculation proves to be correct.

Best Regards
FTI is different story, they were branded as safe but weren't. in Bond terms they should be have been labelled Credit Risk fund. Beside news is coming out that FTI use to pay 2-3% upfront commission to brokers paddling these funds. Barring Ultra Short Term fund, others have bond maturity of 1-3 years! so investors will have to wait at least that long. Do read about their macaulay duration which is weighted avg of duration of maturity of bonds. Different funds will have different maturity period.
 

TracerBullet

Well-Known Member
#13
Friends, the way in which "Franklin Templeton Debt Fund" has blocked its investors (and now they are stuck for a next few years into it), has made me a bit worried as well. I also invested 12 lac into a debt fund last year in April. I invested with 3 cheques of 4 lac each, on 3 different dates for which I got 325 Totoal Units of the Fund, as follows 108.45 + 108.55 + 108.59 = 325.59 Units.

All of it is invested into this - "HDFC Liquid Fund - Direct Plan - Growth"
https://www.moneycontrol.com/mutual-funds/nav/hdfc-liquid-fund-direct-plan-growth/MHD1205

Is there any chance that HDFC Fund might also face such issues ? Should I liquidate and take my money out ? I cannot afford to block this money for a few years.

Infact I have pledged all of this 12 lac amount units with my broker, for which he is giving me around Rs 10 lac worth of trading margin facility. The units are with the broker currently and I am not even sure, how this whole thing works. If legally I am still the owner of my debt fund units, or if the broker has become their owner now, because I have pledged it to him, by signing the delivery slips and transferring the units to his account !

Please guide me. Thanks for any help.

Best Regards

PS: My original purpose of investing this 12 lac into THE DEBT FUND was to get higher return compared to the Bank Saving Account, as well as use the same money for trading purpose by pledging the fund units to the broker. Is this approach correct, or am I making a mistake by doing this ?
In all likelihood, liquid funds should be alright as they have a lot of RBI bonds and liquid High rated bonds.
But -
1) Returns on these have crashed and may fall even further - i hope it does not go to 0/negative
2) I keep large part of my trading capital in debt, away from broker. In my case i chose to be more conservative and moved to overnight funds as i dont want to hold corporate bonds and dont care for 1 % extra returns.
3) In normal times i might keep the money in a mix of overnight/liquid and funds with short term high rated corp bonds.
Another approach can be to invest in gilts where credit risk will be almost nil - but unfortunately it seems short term gilt funds have disappeared and so you will have to put in longer term funds which can be a bit more volatile due to duration risk.
 

iTrade

Well-Known Member
#14
In all likelihood, liquid funds should be alright as they have a lot of RBI bonds and liquid High rated bonds.
But -
1) Returns on these have crashed and may fall even further - i hope it does not go to 0/negative
2) I keep large part of my trading capital in debt, away from broker. In my case i chose to be more conservative and moved to overnight funds as i dont want to hold corporate bonds and dont care for 1 % extra returns.
3) In normal times i might keep the money in a mix of overnight/liquid and funds with short term high rated corp bonds.
Another approach can be to invest in gilts where credit risk will be almost nil - but unfortunately it seems short term gilt funds have disappeared and so you will have to put in longer term funds which can be a bit more volatile due to duration risk.
AMFI should invest in advertising how they tackle franklin like situations. Just spending money on “Mutual fund sahi hain” is not enough. Now Dhoni comes and changed the definition to Mutual funds are good for retirement. i dont think even SEBI knows are they really good :D
 

siddhant4u

Well-Unknown Member
#15
AMFI should invest in advertising how they tackle franklin like situations. Just spending money on “Mutual fund sahi hain” is not enough. Now Dhoni comes and changed the definition to Mutual funds are good for retirement. i dont think even SEBI knows are they really good :D
on lighter note, Dhoni is right... 'maine apana retirement soch liya' tum logo ko MF bechane ka... :p
 
#16
Thank you so much for the information @siddhant4u , @TracerBullet, @iTrade

Seems like my 12 lac in HDFC Liquid Fund are not at great risk for the time being. But still wondering, if there is any harm in selling all of it on Monday Morning and then keeping the cash in saving bank for a month or so, just to make sure HDFC Funds do not face similar problem, and then again buy back later next month, if everything is fine. I am ok with loosing the returns for one month, but do not want to end in a situation like @novicetrader007 bhai, where one cannot take out their own money.

Is there anything wrong in selling all units now, and buying them later on ? Please guide.

Thanks again
 
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#17
I am also posting the important links from other threads, so that this mutual fund issue related information remains in one place, and other members who have their money invested in debt funds, can use this information.

you heard what FTI was doing right? they couldn't liquidate their bond holdings so they tried taking loans from bank and pay back to customers. If you go by twitter, this information was available in market and many took out their money from FTI fund and others. Today it's even in news. I guess, whichever fund is coming up on TV to say "Everything is fine" is actually in trouble.

RBI has yet not allowed any credit line. However it would bring back confidence in system if govt had said this. Last time credit crunch happened in 2008, RBI opened credit line, but only 30-40% applied, but it gave market confidence.

all such charts comes out only after the news... tab tak retailers keep putting the money in debt funds



View attachment 42089
 
#18
Mutual funds scramble to keep lid on Franklin impact, may ask for RBI’s help

Mumbai: Mutual funds (MFs) are worried that the collapse of six debt schemes of Franklin Templeton India will set off a redemptions crisis in the nation’s asset management industry.

Asset managers are marking down bad investments, seeking bank loans and a liquidity intervention from the Reserve Bank of India (RBI) to contain the fallout of large redemptions. As of 23 April, four fund houses had borrowed ₹4,427.68 crore from banks to manage redemption pressure, according to Association of Mutual Funds in India, or Amfi.

While most asset managers claim their debt schemes will be able to meet the redemption pressure at this point, things could get tougher if the lockdown isn’t lifted soon. In such a case, managing redemptions would require a direct credit line from RBI.

Credit markets in India have been under pressure even before the coronavirus pandemic. The 40-day nationwide lockdown to stem the spread of the virus has only intensified the problems faced by debt markets, which were already grappling with slowing growth, defaults by borrowers and a liquidity squeeze that has left most of India’s non-banks struggling.

Franklin Templeton’s troubles are linked to its aggressive bets on lower-rated company bonds, the worst affected in the current crisis.

“Debt market would require steps from RBI; there isn’t a liquidity crunch, but there is a need to keep the confidence high. Sometimes, it is in the form of a line of credit and sometimes, in an extreme case, central banks have themselves purchased bonds and not relied on banks," Milind Barve, managing director of HDFC Asset Management Co. Ltd, said in an interview with CNBC TV18.

RBI’s line of credit is the last resort and should not be free money, said Dhirendra Kumar, founder of Value Research.

So far, the Securities and Exchange Board of India (Sebi), RBI and the government have not said anything about the crisis in the mutual funds industry.

Former finance minister P. Chidambaram, in a statement on Saturday, asked the Centre to act promptly to stop any cascading effect of the unprecedented closure of six debt funds. He referred to the liquidity window opened up in 2008 as a possible solution.

The central bank opened a special window for commercial banks to meet the cash requirements of mutual funds in 2008 and 2013. In 2008, the central bank opened a special 14-day repo window of ₹20,000 crore to enable banks to raise money and lend to the funds, but received only four bids for ₹3,500 crore. Similarly, in 2013, RBI opened a special three-day repo window that allowed banks to borrow a total of ₹25,000 crore at a rate of interest of 10.25% to help mutual funds tide over their liquidity problems.

“The liquidity window given to mutual funds at that time had calmed the market. It was more of a psychological step," a retired central banker said on condition of anonymity.

RBI has allowed banks to avail of cheap funding under the targeted long-term repo operations (TLTRO) and use it to acquire up to 50% of the holdings from primary market issuances and remaining 50% from the secondary market, including from mutual funds and non-banking finance companies (NBFCs).

According to Nilesh Shah, managing director of Kotak Mahindra Asset Management Co. Ltd and chairman of Amfi, NBFCs need more funding.

“There are some AAA, AA, A rated NBFCs and some even lower. Credit flow is available from capital markets to higher-rated NBFCs where a majority of mutual fund portfolios are invested. We have to ensure that credit is available at lower end of credit curve as well," said Shah.

Currently, banks are parking over ₹7 trillion in RBI’s reverse repo window as they avoid lending citing increased credit risk from companies affected by lockdown.

“Funds are available at cheaper rates and the banking system is awash with liquidity. Mutual funds need money. Hence, the demand for a credit line. So, we need to create a structure where somebody will take that credit risk away from banks," a private sector banker said seeking anonymity.

“TLTRO was announced in March at a time when there was fear of liquidity in the market. However, not more than ₹1 trillion is utilized, which shows that liquidity is not an issue. We saw a similar situation since 2008 and MF industry has been managing risks well under Securities and Exchange Board of India guidance," said A. Balasubramanian, chief executive officer at Birla Sun Life AMC Ltd.

According to Arvind Chari, head of fixed income and alternatives, Quantum Advisors Pvt. Ltd, the main concern is risk aversion.

“Despite all the actions taken by RBI, the financial system remains frozen but for government bonds, PSU bonds and strong AAA-rated corporates. The rest still find it difficult to access the bond market, and that acts as a feedback loop that further increases risk aversion among investors," said Chari.

Investor sentiment has taken a big knock. The market is constantly looking out for the next weak bank, the next NBFC to default and the next credit risk fund to redeem.

To manage these risks, mutual funds are aggressively writing down bad exposures to prevent outflows, said a distributor on condition of anonymity.

For instance, BOI Axa Credit Risk Fund lost 50.22% of its value on 24 April on account of a mark down of various securities by the fund house. Aditya Birla Sun Life Medium Term Fund was down 4.72% overnight on 24 April due to a markdown of an IL&FS Special Purpose Vehicle company.


“We are simply aligning the security to valuation suggested by external valuation agencies," said Balasubramanian.

With inputs from Neil Borate & Nasrin Sultana


https://www.livemint.com/mutual-fun...o-seek-rbi-s-intervention-11587900606693.html











The above article says BOI Fund lost 50 % of its value on 24 April on account of the mark down ! Does this mean that if someone had 10 lac invested into this fund, he will now have only 5 lac value remaining with him, if he wants to redeem his fund units today ? Or am I misunderstanding this highlighted paragraph ?

Thanks and best regards
 
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TracerBullet

Well-Known Member
#19
.

Is there anything wrong in selling all units now, and buying them later on ? Please guide.

Thanks again
No nothing wrong with it, as long as you are comfortable with keeping it with your bank. Even that can have risk these days ... Can do FD for small duration too.

Overnight Funds are supposed to have safe collateral ( govt bonds) for a large part of their holding as they trade in something called CBLOs among others. They give bank deposit like returns too these days as yields have crashed.
 
#20
Our study shows that on a rolling return basis, no mutual fund has ever given a negative return over 5 years. This one line has a lot of depth in it. In any 5 year period of the market, starting at any point the returns from an SIP has been positive and that is the risk that one should look at. Now if there is sufficient data to prove that money will never go negative on a 5 year basis then why is there a worry about risk? An investor has to just plan his minimum time frame of 5 years and start investing.
 

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