Changes in holdings across equity and debt mutual fund schemes can give early warning signs for investors
Every month, fund houses issue factsheets that contain portfolios of all the schemes that they manage. Many of us might treat portfolio disclosure emails as spam and hit the trash button. However, your fund portfolios hold precious clues on how healthy or unhealthy they actually are. On October 5, 2020, the Securities and Exchange Board of India (SEBI) introduced a rigorous risk-o-meter that would clearly indicate the risk-profile of the scheme; it comes into force next year.
But that doesn’t mean you should wait till next year. There are other things you keep an eye on, in your monthly portfolio disclosures.
Has my debt fund borrowed too much?
To be sure, it was not just Franklin, but many other fund houses too reported negative cash balances. Due to the liquidity crunch in debt markets following COVID-19, several fund houses were forced to borrow from banks to honour withdrawal requests of unitholders. So, negative cash balance can show you how stressed the portfolio is in terms of generating liquidity. It is an indication that the portfolio doesn’t have enough liquidity in its investments.
Is the fund churning too much?
A good indication of a well-run scheme is that a fund manager makes an investment after a thorough analysis and with conviction. However, if there are frequent entries and exits of large stock exposures in an equity scheme, it may be because the fund manager has no clarity about his own investment strategy. So, this is another aspect that you should watch out for.
In a debt scheme, you should look for any fresh investment in a lowly-rated corporate bond. It is possible that a corporate bond investment is moved from another stressed scheme to the one that you have invested in. If such an investment gets downgraded further or defaults, it can hit your scheme’s net asset value. SEBI has recently laid down guidelines to check any misuse of inter-scheme transfers. These changes will come into force next year.
What about credit risk?Unless you have a credit risk fund, too much investment in low-rated bonds can spell bad news. "A large number of bonds that are below AAA-rated could lead to troubles for the scheme,” says Rushabh Desai, a Mumbai-based MF distributor. Keep a check on your debt scheme’s credit risk profile that every fund house gives in its factsheet.
From October, new disclosures about the yields of all the underlying instruments of your debt fund would help you further ascertain how much risk your debt fund has been taking.
Is my fund diversified enough?Or is it concentrated across just a few sector or scrips. A ‘focused’ equity fund specifically comes with a mandate of investing in stocks of just 20-30 companies. A diversified fund has more diffused holdings. To be sure, a focused strategy is not bad. Some fund managers have been known to run concentrated strategies across their schemes, because it is their inherent style. If your fund manager gets both stock picks and concentration right, there could be stupendous returns. If not, it can backfire in certain markets. “Both in equity and debt schemes, if a large chunk of a scheme’s exposure is deployed in a few companies or a single business group, such schemes should be avoided,” says Kirtan Shah, chief financial planner, SRE.