DEVIL IS IN THE DETAIL
Past couple of days, there were lots of WhatsApp forwards on how most of the Credit Scheme redemptions are met by transferring them to other schemes of the same AMC. Some concalls were also made by AMCs to quell these doubts and/or give explanations for the same. All the WhatsApp groups were only abuzz with these stories throughout the day with lot of agitated to and fro among the group members.
All of us know that both Advisors and Investors are in a panic zone post lock down of 6 Debt schemes of an AMC. If we create more panic on such topics without understanding the full implications, we will only create trust deficit in the Mutual Fund Industry. Currently that trust deficit is in Debt space, contagion will take it to Equity, Hybrid, DAAF category as well. So, let us act more responsibly and then communicate amongst our IFA friends who in turn will carry the message with more clarity to their Investors.
My take on this topic:
- It is within SEBI guidelines to do inter scheme transfers
- Check where these Credits have moved? Have they moved to schemes which were hitherto not investing in Credits before these redemption pressures or they were transferred to schemes which were already investing in Credit papers? If yes, then where is the scope for any further discussions?
- Were these transferred at market valuations? Or, investors of one scheme benefitted at the cost of investors of another scheme?
- For this SEBI does regular audits and hence, there is no reason to believe that investors of either schemes would have benefitted or lost out
- If the Fund House had belief in these papers in their Credit Risk Fund, why would they sell them in the open market (during such illiquid, risk averse market) and create loss for existing Investors?
- If these papers were available at higher yields with proper collaterals; why should the same not remain within schemes which has mandate to invest in such papers?
- Those who had transferred to say, DAAF schemes; again, the same question arises whether they had invested in such papers even prior to March 2020. If yes, then why should we be questioning this transfer?
- By the way, since low of Equity Markets in March 2020; equity markets have bounced back. Based on that, DAAF schemes would have had to increase their debt allocation and reduce Equity allocations even beyond these transfers. Then why not buy papers from other schemes which were bought with proper due diligence and collaterals in the first instance?
- Many Fund houses have done this to avoid erosion for Investor values in Credit Risk scheme – not due to lower or bad credit but due to liquidity issues currently
- Many have been transferred to either Hybrids or DAAF category schemes. Both need constant Debt papers of which at least 20-30% remains in Debt and can be under HTM categories i.e. hold them till their maturities
- Most were top rate Credits from groups like Tatas, Bharti, Bajaj Finance, etc. -though in AA rated category
- Buying schemes have got the benefit of getting good papers at very decent yields due to current liquidity issues
- AA rated implies: “Instruments with this rating are considered to have very high degree of safety regarding timely servicing of financial obligations. Such Instruments carry very low Credit Risk” – CRISIL standard
If the AMCs have followed all the above conditions while doing inter scheme transfers; then there is no point in creating doubts, chaos or fear in the minds of Advisors and Investors. Let us not spread unnecessary negativity during such times without understanding full implications of what AMCs have done on this topic. Question with facts and figures only if these transfers were done in schemes which did not have the mandate to invest in these papers or it was done at a price which would have benefitted investors of one scheme at the cost of the other scheme.
Hope, I have put this topic and its implications in the right perspective.