Ever since the news broke out that Kotak mutual fund has held back part payment to its unitholders on maturity of its series 127 and 183 FMP on the account of non-repayment by Essel group promoters, it spread jitters among investors with regard to safety of their money. Lakshmi Iyer, CIO (Fixed Income), Kotak AMC, sought to allay investor concerns, saying that the money will be paid back to unitholders, with interest, by 30 September — the deadline for Subhash Chandra-led entities to pay the dues.
In an interview with Financial Express Online, Lakshmi Iyer tells Shaleen Agrawal where Kotak mutual fund investors stand now, and what the fund has done to mitigate risk. She also explains why interest rates will stay soft for some time. This is the time to invest in debt mutual funds, she says. Here are edited excerpts.
What choices did Kotak mutual fund have when the FMP with Essel holdings fell due for maturity?
For us, there were only two choices. It would have been easier to sell the stocks in our account. We could have sold the stocks, and realised the money, and those monies would go out to the unitholders with risk of possible under recovery.
How did you decide upon one choice over the other?
In the above path, we may not have recovered 100% of the money. As you saw in the past, when 2-3 lenders tried to sell the stock, there was a price correction. On balance, as other payments were made, we thought it would be more prudent to wait for money from Essel Group promoters, and return the money to the investors along with the accrued interest.
Where do Kotak investors stand now with regard to the recovery of their dues?
In the interim, we have done more fortification of the investment structure to mitigate some of the risks. We have got a personal guarantee from the promoters; there is a proposed stake sale by the promoters; on top of this, there is an accrued interest which the debentures have to pay; and this is in addition to the company stocks, which we are still holding, which we can sell, if the need be.
What risks do Kotak MF investors still face in the Essel group incident?
One risk is what if the stake sale doesn’t happen? We have been engaging with the company and will keep interacting with them on a periodic basis, and take corrective measures along the way where needed. We have a very liquid collateral — the shares. Even if there is not a 100% recovery, it would not be zero too if worst case kind of scenario were envisaged. Our actions have led to only a notional loss to the unitholders, and not an actual loss.
What else must fund managers look for, other than credit ratings, while making investment decisions?
Do we go only by ratings? No. Ratings are necessary but not sufficient. We look at several other things when we make investment into a security, such as the governance structure, business fundamentals, and more. But, there are always such tail-end risks. No one could anticipate that there would be a fatal accident three years hence. While our vehicle got scratched, what we have done is to try to save our it from total damage. I would have wanted to avoid getting this scratch as well.
What steps did you take to mitigate risks across different schemes?
There is no contamination on the fund-wide level. We had clear demarcation where individual schemes are going to invest. In this scheme, we had decided to go for higher yield A+ rated securities, and not fully AAA. So, we took some credit risk in this plan, but schemes were clearly demarcated by risk profile.
What is your outlook on interest rates?
There is a lull across the globe; we might see a slowdown. We are headed towards a low inflation-sluggish growth environment globally, which will percolate to India as well. Interest rates are likely to remain soft in a slightly long haul. There might be some intermittent rate fluctuations based on local factors, but given the global situation — US narrative, China slowdown, Europe quantitative easing — interest rates will be largely stable in India as well. Though crude price is inching up gradually, it is yet not enough to raise an alarm. As long as crude price is under control, an upturn in the interest rate cycle is not expected for next 3-4 quarters.
In this soft interest rate scenario, does it make sense to invest in debt mutual funds?
It does make a lot of sense to invest in shorter duration debt funds in such an interest rate cycle. Such lower duration funds are good to manage and tide over market volatility.