IL&FS default case: Why debt fund investors need assurance right now

The Rs 24-trillion mutual fund industry is staring at uncertain times, yet again. With debt funds having an exposure of Rs 20,000 crore, perhaps even more, to defaulting companies such as IL&FS, Essel group and Reliance group companies, clearly thousands of investors would be adversely impacted. This is quite reminiscent of 2008 when fixed maturity plans (FMPs) defaulted, and investors went on a redemption spree.

This time, though, investors have been mature. But many are worried. Distributors and investment advisors are getting regular calls from investors who are unsure of the future. And their worries are entirely legitimate. With mutual funds’ Rs 1.3 trillion exposure to non-banking financial companies set to mature in the next three months, the question is – will there be more defaults? To make things worse, there are regular downgrades from rating agencies, leading to added uncertainty.

The Association of Mutual Funds in India, or Amfi – the industry body of the mutual fund industry – has an important role to play here. It needs to swiftly step in and assure investors with the famous Aamir Khan dialogue – all’s well. It also needs to provide details of each fund house’s exposure to these troubled companies, much like the monthly data it gives on rise/fall in average asset under management. This will assure investors that things are not being swept under the carpet.

In fact, the ‘mutual funds sahi hain’ advertisement should be replaced with one that gives a powerful message to investors in debt funds. It should have been done months back. But it’s not too late. As an industry body, it is duty bound to do so. In the past, Amfi has not played any significant role in times of crisis. Yes, it might have held meetings with stakeholders (read fund houses and distributor), but its direct communication with investors has been limited to promoting mutual funds. It is a good time to turn things around.

Another problem of not communicating with investors is that the market regulator – the Securities and Exchange Board of India – feels duty bound to bring in more regulations after each incident, which makes life difficult for fund managers. It has already sent show cause notices to both HDFC and Kotak Mutual Fund on their Essel Group exposures.

There was a time when CEOs and fund managers constantly complained about regular changes in guidelines, which did not allow them to function properly. In Sebi’s defence, it felt, and perhaps stills feels so, that it needs to set things right. And in such circumstances, a show of action from the industry body is likely to assuage the market regulator’s concerns as well.  

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