Protect The Interest Of Investors
The mutual fund investors of both equity and debt categories have been suffering and struggling for a while to get better returns. The fall in equity market and few major credit events in the last one year have adversely impacted the performance of these two respective categories of mutual funds. Nevertheless, there seems to be some relief for debt fund investors as the Essel group, which had exposure of around Rs. 6000 crore at the end of March 2019 to debt mutual funds and had delayed its payment for certain reasons, has made partial repayment to mutual fund houses. Altogether, nine AMCs have lent to Essel group across 87 schemes, including FMPs and open-ended debt funds.
On the surface, it seems good news for all investors. However, there are some investors that have gained more than the others at the expense of some investors. Once a company fails to pay its dues on time or the debt issued by them is downgraded, the Securities and Exchange Board of India has issued guidelines to make the NAVs of debt funds more realistic. If debt securities are rated below investment grade, such securities should be valued fairly reflecting the repaying capacity of the issuer. This normally means writing down the value of the investment that would lead to lower net asset value of the scheme. This provides perfect opportunity for an opportunist investor to enter such funds after the NAV is marked down. To address such an issue, the regulator has clearly laid out how to ring-fence the interest of original investors by side-pocketing, which means segregating the identified distressed asset into a separate portfolio to limit the impact on the main portfolio. However, barring couple of fund houses, all others have failed to do that.
One of the reasons given by the industry experts for not doing side-pocketing is the tedious operational issues involved in side-pocketing. Moreover, there also seems to be some inflexibility in the regulator's circular that might have prevented the industry from acting on time.
Therefore, the fund houses should be pro-active to resolve such issues in the interest of the investors and the industry. At the same time, the regulator can also bring in more flexibility so that the interests of the investors can be protected.