Mutual fund investors should restrict themselves to few categories schemes with high-quality portfolios apart from overnight and liquid funds.
The Franklin Templeton debacle prompted the Reserve Bank of India (RBI) to open a special liquidity facility for banks to lend to mutual funds. After winding up six debt mutual fund schemes, the fund house clarified that it will periodically sell the underlying debt instruments to return investments made by unitholders. With the crisis in the mutual fund industry, Omkeshwar Singh, Head of RankMF, Samco Securities, advises investors to stay prudent while investing in debt funds. Singh further elaborates and reveals if this is the right time to rebalance the portfolio or not. Here are the excerpts of Omkeshwar Singh’s interview with Surbhi Jain of Financial Express Online.
1. As the Franklin Templeton episode highlighted the liquidity crunch in the mutual fund industry, is it a time to rebalance the portfolio?
Just as all of us are keeping ourselves and our families sanitised from COVID 19, investors must undertake to sanitise their portfolio, weed out low-quality schemes and switch to schemes with high-quality portfolio i.e. completely ignore past performance, big brands, big names and objectively evaluate the actual portfolio of the schemes that you have invested in because it is the quality of the portfolio and its strength that will protect capital and generate superior risk-adjusted returns. If the quality and the strength of the portfolio is adequate, then the portfolio will have more chances to provide superior returns
If the quality and the strength of the portfolio is not adequate, it is advisable to “switch the portfolio” to good quality and high strength mutual funds so that the chances of recovering lost capital increases along with adequate returns.
2. Will RBI’s special liquidity facility help to save investors’ money or not?
RBI’s special liquidity facility is to smoothen the nerves and to avoid panic redemptions in debt mutual funds especially the credit risk funds. Good quality debt instruments were already getting funding even prior to this special liquidity facility, the pressure is on the lower grade/credit risk/unlisted debt instruments. This facility is available through banks where banks are not keen on providing loans or buy these low quality and unlisted debt instruments as they themselves are sitting on an uncomfortable level of NPAs and are completely risk-averse. Therefore, RBI facility to mutual funds will provide confidence but will have no impact on the safety of investors money.
3. How do you see mutual funds’ performance in two years from now?
If we look at the history, the shortest bear market has been of 18 months in India and given the present situation due to COVID-19 pandemic, there will be very select few great quality schemes that will be able to outperform indexes in next 24 months. Overall the performance will be dependent upon the easing and normalisation of economy post COVID-19 lockdown. Most Corporates, MSMEs, NBFCs, MFIs are heavily dependent upon fiscal and monetary stimulus for liquidity, survival and thrival!
Presently if we look at all the mutual fund schemes there are very few equity schemes that may do better based upon a good quality portfolio and very high margin of safety. COVID-19 has provided once in a decade or maybe once in a lifetime opportunity to accumulate these funds as they are a bargain buy. A few categories that are better equipped than others are Multicap, Large-cap, Focused and Midcap.
4. Even as six Franklin Templeton shuts 6 debt schemes, are Franklin’s other funds safe?
There is a loss of trust in the short term, safety first will take over returns to protect the capital. There may be a flight of funds towards safer investments, however, blanket withdrawal is not a good strategy, instead, investors must evaluate and review their portfolio and act accordingly
Presently based upon the quality of portfolio and margin of safety and completely ignoring the past performance and bell curve methodology, RankMF’s proprietary research and rating engine show 17.85 % of all of its schemes are Investable grade.
5. What are your preferred stocks of Indian mutual funds?
The business and delivery models of many companies may see substantial change post COVID-19 world and we have a simple principle, investments in great companies at fair or great prices deliver great returns and investments in poor companies and/or at poor prices deliver poor returns. This is true for both equity and debt instruments of companies.
We have completely taken out subjectivity and manual intervention and build a giga trading engine leveraging AI & ML which churns more than 2 crore data points daily both fundamental as well as technical lets us know
(a) Quality of the stock
(b) Margin of safety i.e. value for money
It is humanly impossible to track over 2 crore data points and the business environment in post COVID-19 world will be very fluid, preference has subjectivity and biases, therefore, preferred stocks are completely on the quality of its fundamentals like growth, capital efficiency, balance sheet quality, quality of earnings, corporate governance, the margin of safety etc., of the company vis a viz Industry and adjusted to red flags like promoter pledge, debt etc., and incorporating technical trends as well to track breakouts etc.
6. How mutual fund investors can avoid the Franklin Templeton kind of fiasco?
Investors should be prudent while investing in debt funds and should always look only for the quality of the portfolio and should completely ignore past performance, big names and big brands while making investments. Investment in mutual funds are subject to market risk and is applicable to all schemes including debt schemes. Debt schemes are not risk-free, neither guarantees non-negative returns further all debt schemes are not the same.
Investors should restrict themselves to few categories schemes with high-quality portfolios apart from overnight and liquid funds i.e.
1) Money Market Funds – for investment up to 1 year
2) Short Duration Funds – for investment from 1 to 3 years
3) Corporate bond Funds – Any duration
4) PSU and Banking Funds – Any duration
5) Gilt funds – Short to medium term duration.