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It is not the time to panic.
Instead investors should keep their faith in fixed maturity plans (FMPs), as ‘every chest pain is not a heart attack’, says Lakshmi Iyer, chief investment officer for fixed income at Kotak Mahindra Asset Management.
There are uncertainty among Indian mutual fund investors about the prospects of schemes holding securities of Subhash Chandra’s Essel Group entities.
Kotak Mutual Fund earlier this week delayed full redemption in several fixed maturity plans (FMPs), while HDFC Mutual Fund, the country’s largest, has given unit holders the option to roll over investments for another 380 days instead of redeeming at maturity on April 15.
The mutual fund industry has a debt exposure of around Rs 7,000 crore to the Zee Group.
According to Morningstar India, as many as 10 fund houses held securities of Zee or Essel group promoter entities in various schemes as of December 31 last year.
Cumulatively, mutual funds hold paper worth Rs 8,000 crore in these companies.
Wealth managers says investors have turned jittery about the repayment capabilities of Essel, which has bought time from lenders — mutual funds and non-banking finance companies (NBFCs) — till September 30 to pay back the money.
It is still not clear whether investors seeking refund would have to take a haircut.
Nilesh Shah, Managing Director of Kotak Mutual Fund and an industry veteran, on Thursday told ET that till today, in the 25-plus years history of debt mutual funds, there is no incidence of a mutual fund losing money in loan against share (LAS).
“Now in an instrument where mutual funds have never lost money, just because there is one restructuring, should mutual fund stop investing” he asked.
Iyer, Shah’s CIO, told ETMarkets.com two of the six FMPs that hold debentures backed by Zee shares to the tune of Rs 372 crore have matured, and excluding of this money, the remaining principal along with the returns accrued on it have been returned to shareholders.
“We have given some allowance of time to the company for Zee management to be able to sell the stake or the business and return the money to us along with accrued interest.
We will return it to investors on or before September 30, which is what we have communicated to the unitholders,” she said.
Ashish Shankar, Head of Investment Advisory at Motilal Oswal Wealth Management, said while fund houses are working towards a settlement, one is not clear how this whole episode would pan out.
“It is best that investors wait for this to settle down,” he said.
There are reports that market regulator Sebi would ask Kotak Mutual Fund and HDFC Mutual Fund for details on their decision-making process and the applicability of the guideline with regard to repaying those who invested in their schemes that had an exposure to the Essel group.
The regulator is reportedly examining the different approaches taken by the two large fund houses with regard to repayment.
Sebi has reportedly asked for an update on the meetings and discussions between the promoters of the Essel Group and the committee of lenders since the two inked the so-called standstill agreement.
Iyer insists Kotak MF has not violated any issuer limit or the group limit norm set by the regulator.
“This is a fixed maturity plan, which means the investor comes in during the NFO period and is wedded with you till the maturity.
The exit, if possible, is only through the stock exchange, which typically is not very liquid,” she said.
“If you look at any of our open-ended funds, we are nowhere near the mandatory threshold.
That clearly tells you that liquidity management has a different objective, but there is no compromise on quality,” Iyer said.
She said the biggest learning from the recent turn of events was that an asset manager needs to watch out for leverage very closely.
“The key thing to watch out for is ‘leverage, leverage, leverage’.
The moment a business or a promoter goes into excess leverage, that is where some element of greed has come in and that inevitably has to find its equilibrium on mean reversion and it is very important not to get carried away in times like these,” Iyer said.
She also hinted at an internal review of the risk management process within Kotak Mutual Fund.
“Of course, there are other parameters on which you will try to tighten up the screws to ensure that you further fortify your risk management systems.
There were risk management systems which were followed at the industry level.
I think every accident or every near-accident makes you check your vehicle just for the sake of caution and I think that is what we intend to do and that is what we have been doing,” she said.
