The quality of portfolio and robustness of process should have greater importance than brand name or size of AUM or AMC, Pankaj Pathak, Fund Manager, Fixed Income, Quantum Mutual Fund, says in an interview to Moneycontrol’s Kshitij Anand.
Q) Franklin Templeton has shut down six credit risk strategy debt funds, the second casualty of coronavirus outbreak after IndiaNivesh. Do you think investors will again lose faith just like they did after the post-2008 financial crisis?
A) Since the IL&FS default in September 2018, there has been a series of events that have created a trust deficit for investors in debt mutual funds.
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At this time, one needs to questions the way debt funds are sold and the basis on which funds are selected and the general behaviour of yield-hunting in debt funds.
In the broader ‘Asset Allocation’, the role of fixed income is to provide diversification from equities. In bad times, when equities fall, we expect fixed income exposure to provide some stability to the portfolio.
But, with high exposure to credit/lower-rated debt, which usually moves in tandem with equities, it fails to fulfil this role. Thus, it becomes essential to remain extremely risk-averse while selecting debt funds.
In our opinion, the quality of the portfolio and robustness of the process should have greater importance than the brand name or size of AUM or AMC. I hope investors will keep a closer eye to these parameters than just going for higher yield in debt funds.
Q) If investors have debt funds what should they do now? ‘Is my money stuck’ is the question being asked by investors.
A) Investors should not panic and should focus on their asset-allocation goals. However, it would be prudent to re-evaluate risk in the debt portfolio.
For long, we have been advising investors to be extra cautious of credit and liquidity risks and to prioritise safety and liquidity over returns in their debt exposure. Given the level of uncertainty in the economy, it has become even more important now.
Q) Do you think the current scenario will lead to redemption pressure in equity funds as well?
A) These types of events could cause extreme risk aversion among investors. So, we cannot rule out the possibility of redemption pressure on equity funds as well.
Q) What are the steps you are taking to safeguard investors’ interest?
A) We have been stressing on the important aspect of the investment objective of each scheme and whether the funds are being managed ‘true to label’. In Quantum, we follow this principle to align the funds’ portfolio with its objective.
In the case of a liquid fund, the objective is to first keep your money safe and liquid and then try to earn a sensible return.
Thus Quantum Liquid Fund prioritises safety and liquidity over returns and invests only in government securities and few top AAA rated PSUs, which are selected after careful assessment of their credit quality. Both of our debt funds do not take any private credit exposure.
In the past few weeks, we have reduced the exposure to even AAA-rated PSUs in both our debt funds - Quantum Liquid Fund and Quantum Dynamic Bond Fund. Both the funds now hold a very large proportion of the portfolio in government securities and treasury bills.
We believe that we will be holding this conservative stance for a long time as we do not expect things to stabilise anytime soon.
Q) Experience tells us that history never repeats but rhymes. An outbreak that can snowball into a financial crisis– what will be the post-COVID-19 world be like? Will it change the way people invest and save?
A) This crisis has exposed us to risks that we have been ignoring for a long time. In that sense, it will definitely change our behaviour towards consumption and saving. People will probably look to have a larger safety net before spending on consumption.
Similarly, with respect to investments, the focus may shift to have a truly diversified portfolio than just trying to maximise returns.
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