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Gold has indeed proven itself as an effective hedge against any downside risk. It has seen a sharp rise in the price rally since the first case of Novel Coronavirus was reported in November 2019.

In the beginning of March, gold prices fell marginally, however it is on the upswing and has retained its level above Rs 40,000 per 10 grams.

Graph: Gold's rising uptrend

Gold started to ascend last year when the US and China trade talks began and escalated in trade war, followed by similar trade wars of the US with other nations.

These events have proved to be favourable for the momentum of the price of Gold. It played its role of a crucial hedge and store of value when other asset classes had witnessed high volatility and posted marginal returns.

Some of the other factors that have supported gold are...

• The outbreak of COVID-19 with no evident containment yet
• Economic uncertainty and fears of a virus-led global recession
• Global GDP growth revised downwards and for across regions
• Easy monetary policy action (of reduction in interest rates and stimulus packages) and an accommodative stance adopted by the central banks across the world to support growth
• A crash in the oil markets due to lack of demand and excess supply with storage problems
• A record-high global debt-to-GDP of nearly US$ 255 trillion (over 322% of global GDP) - 40 percentage points higher than at the onset of 2008 global financial crisis according to the Institute of International Finance (IIF), as the world is fighting the COVID-19 pandemic
• The US Presidential elections later this year, in November 2020
• Increased stock market volatility
• The potential risk to the inflation trajectory.

[Read: Coronavirus Has No Antidote. Your Bad Investments Could Have.]

Besides, the lockdown brought upon due to COVID-19 pandemic is going to hurt the economy for a couple of quarters badly which will amplify the credit risk. The economic activity will slow grind to full capacity, prompting furloughs and pay cuts, and job losses across sectors, which will affect the credit line as the number of defaulters will rise because cash strapping will be seen.

Recognising the risk stemming from the bottom hit economy, where the growth projections by the IMF are almost 1.9% due to the CoVID-19, the NPAs of banks and NBFCs are expected to increase.

[Read: How the COVID-19 Extended Lockdown Has Made Investments in 'Banking Funds' Very Risky]

Until the COVID-19 pandemic is contained and economic uncertainty prevails, the spotlight will continue to be on gold owing to the financial uncertainty it brings along. Even the IMF Global Financial Stability report highlights an increase in the level of risk among multiple global metrics and, therefore, the importance of owning gold in one's portfolio.

Hence, in my view, in the current situation consider allocating some portion of your investment portfolio to gold and its equivalents. This year buying gold in a physical form from your preferred jeweller or gold merchant may not be possible amidst the COVID-19 extended lockdown. But you can always consider Gold Exchange Traded Funds, Gold Saving Funds, Sovereign Gold Bonds, and/or Digital Gold, which are smart and unconventional ways of investing in gold.

Recently the Government of India, in consultation with the Reserve Bank of India, decided to issue Sovereign Gold Bonds. The Sovereign Gold Bonds will be issued in six tranches from April 2020 to September 2020 as per the calendar specified below:

Each of the tranche is offered for a limited subscription period, having a maturity tenure of 8 years and a lock-in period of 5 years

With an initial investment amount of Rs 20,000, resident individuals, Hindu Undivided Families (HUFs), Trusts, Universities and Charitable Institutions can subscribe to SGBs. The application can be also made by the guardian on behalf of the minor. One can purchase units from the secondary market as well.

The issue price of the SGB will be Rs 50 per gram less than the nominal value when applied online and the payment against the application is made through digital mode.

On maturity, the Gold Bonds shall be redeemed in Indian Rupees and the redemption price shall be based on a simple average of the closing price of gold of 999 purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewellers Association Limited.

In order to encourage passive but direct gold investment, as an alternative to purchasing physical gold, Modi led Government sanctioned a Sovereign Gold Bond Scheme in November 2015. Under this scheme, investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by the Reserve Bank on behalf of Government of India.

With the Sovereign Gold Bond Scheme, the risks and costs of physical storage are eliminated. Plus, it is free from issues like the costs of making charges and purity, as in the case of gold in jewellery form. But these bonds are held in the books of the RBI, or in demat form to eliminate even the risk of loss of scrip, etc.

Sovereign Gold Bonds will generate market returns linked to the price of gold, so there may be a risk of capital loss if the market price of gold declines. Moreover, these bonds will provide interest income at the rate of 2.50 per cent (fixed rate) per annum on the amount of initial investment to investors and will be redeemable.

The minimum investment allowed is 1 gram, while the maximum buying limit is a subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF), and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April - March).

These bonds are sold through offices or branches of Nationalised Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL), and the authorised stock exchanges, either directly or through their agents.

Do note, that the interest on the bonds is taxed as per the provisions of the Income-tax Act, 1961. If you hold the SGB till maturity the capital gains tax on redemption of SGB is exempted. But if you sold the bond in the secondary market after three years, long term capital gains (LTCGs) tax is applicable and it will be taxed at 20 per cent with indexation. And if sold before three years, a short-term capital gains (STCGs) tax will be applicable according to the income tax slab.

What should the investors do?

Defeating the Coronavirus and surviving is everyone's core focus and having liquidity, those who have an adequate contingency fund are looking for investments.

Equity and debt markets are yet to see any signs of revival despite the stimulating relief measures provided to uplift the slowing of economy but investing in gold can prove to be worthy for your portfolio.

[Read: What Could Be the Potential Impact of a Lockdown on Your Mutual Fund Portfolio? Know Here...]

Even the bond prices were at all-time lows, which are inversely proportional to gold as well. In my view allocate at least 10-15% of your entire investment portfolio to gold and hold it with a long-term investment horizon.

Remember gold offers an effective hedge during global uncertainty and a shield against inflation. Most importantly in your portfolio, it serves as a diversifier.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

During the COVID-19 lockdown, individuals are losing patience -- moving freely and not following the necessary social distancing. This lack of civic sense and maturity on their part is weakening our fight against the deadly contagion pathogen.

The capital markets, as a result, also has witnessed intense volatility and bears are running lose. Certain sections of investors, however, have shown tremendous maturity during these challenging times.

At a time when Foreign Portfolio Investors (FIIs) have net sold or dumped Indian equities (owing to markets worldwide falling sharply and margin calls being hit), domestic fund managers are looking for value-buying opportunities in the carnage of the markets.

It is also heartening to see retail and High Net-worth Individuals (HNIs) buying into various equity-oriented mutual funds in a lump sum as well as the SIP (Systematic Investment Plan) mode. Monthly SIP inflows have touched a record high in March 2020 and the SIP folios, too, surged to 3.12 crore.

However, in debt-oriented schemes, investors seem to be pressing the panic button. The mutual fund industry recorded a net outflow of Rs 1.95 trillion in March 2020. Barring Overnight Funds and Gilt Funds, all other sub-categories of debt mutual funds have reported an outflow in March 2020.

Advance tax payment obligations, deterioration in asset quality, potential risk of defaults in the COVID-19 lockdown, and heightened volatility in the Indian debt market are some of the key reasons for outflows from debt-oriented mutual schemes.

[Read: Why Investors Pulled Out Money from Debt Mutual Fund Schemes in March]

The massive outflows were also seen from the Liquid Funds and Arbitrage Funds.

Table 1: Action in March 2020

Unprecedented redemptions in the Arbitrage Funds and Liquid Funds, as well as the net inflows recorded by the overnight funds, suggest that investors preferred safety over returns. As you know, liquidity is a key concern as the world continues to fight the COVID-19 pandemic.

Some arbitrage schemes such as Tata Arbitrage Fund and ICICI Prudential Equity-Arbitrage Fund had stopped taking in fresh subscriptions in the third week of March 2020 for the lack of arbitrage opportunities as markets faced broad-based selling.

But now markets are finding some sort of stability and bouncing back -- rallied over 20% from March lows - although the bears continue to run loose.

So, is it a time to consider arbitrage funds again?

Yes, I think so.

Arbitrage Funds aims to exploit the price differential in two different segments (spot and futures or cash and derivatives) of the equity market. They buy stocks in the spot market and sell in the future market simultaneously thereby making gains with the price differential (called the spread).

The differential usually is in sync with the prevailing interest rates in the economy; but depending on the market volatility, it could sometimes be higher as well. That being said, these are short-term opportunities that spring up due to lack of information to a set of market participants in one of the markets.

The capital market regulator's mutual fund categorisation and rationalisation mandates that an Arbitrage Fund must strictly follow the arbitrage strategy and invest at least 65% of its total assets in equity & equity related instruments.

Since the transactions are in either direction, the positions are completely hedged. And the remaining 35% of the total asset is deployed in debt and money market instruments.

In March 2020, when the stock futures started quoting at a discount to the spot prices in the cash market, it was a concern. But now that we have seen some sharp up-moves in the Indian equity markets as the government has done relatively well in containing the spread of the deadly virus (compared to other nations) and thanks to the prompt fiscal measures also have been taken -- both by the Ministry of Finance (the Rs 1.75 trillion package) and the Reserve Bank of India (by reducing policy rates sharply, keeping monetary policy stance 'accommodative as long as it is necessary', and ensuring enough liquidity in the system) -- in my view, it would be perceived positively by the markets in times to come and enough arbitrage opportunities would be available. It is possible that Arbitrage Funds may even perform a tad better vis-a-vis Liquid Funds.

Table 2: Report Card of Arbitrage Fund, Liquid Funds and Short Duration Funds

Over the last one year, the returns generated by Arbitrage Funds have been quite satisfactory. In fact, these funds have outperformed those clocked by Liquid Funds. The 3-month returns clocked by Arbitrage Funds have been almost at par with Liquid Funds.

Do note that an Arbitrage Fund carries low risk and the returns depend on the market conditions and fund manager's ability to reap rewards from arbitrage opportunities.

Short-Term Capital Gains (i.e. realised profits within a year) on arbitrage funds are taxed at 15%, while the Long-Term Capital Gains (i.e. gains made after staying invested for more than a year) are taxed at 10% for gains above Rs 1 lakh in a financial year.

To park money for the short-term for an investment time horizon up to 1-year, you may consider investing in an Arbitrage Fund.

And if you have an extreme short-term time horizon (of 3 to 6 months), consider a Liquid Fund with high-quality debt papers, which does not have high exposure to Commercial Papers (issued by private entities).

Alternatively, if you wish to park in a much safer category, you would be better off investing in an Overnight Funds.

Happy Investing!

PS: If you wish to select worthy mutual fund schemes, I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect.

Additionally, as a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.

Each fund recommended under FundSelect goes through our stringent process, where they are tested on both quantitative as well as qualitative parameters.

Every month, PersonalFN's FundSelect service will provide you with insightful and practical guidance on equity mutual funds and debt schemes - the ones to Buy, Hold, or Sell.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!

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Author: Rounaq Neroy

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

COVID-19 has started showing its impact on the mutual fund industry. Few days ago I mentioned in my article, Debt mutual funds witnessed massive outflows of Rs 1.95 trillion in the month of March.

Though we could attribute most of that outflow to corporates redeeming funds to meet their quarter end obligations, high volatility and uncertainty as consequences of the pandemic could have also played a major hand in the redemption pressure for debt schemes.

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FII have been redeeming investments heavily in equity and debt segment ever since WHO declared COVID-19 a pandemic. In March, FIIs pulled out Rs 60,375 crore from the debt market.

High redemption and lack of buying interest has made debt mutual fund schemes vulnerable, especially those with higher exposure to low rated instruments.

This instability has claimed its first casualty in debt mutual funds...

Franklin Templeton Mutual Fund (FTMF) has decided to wind down six of its debt schemes with effect from April 23, 2020 due to COVID-19 related market dislocation. This is something that is unheard of in the mutual fund industry and has perplexed many investors and advisors.

The schemes that are wound up are:

• Franklin India Low Duration Fund
• Franklin India Dynamic Accrual Fund
• Franklin India Credit Risk Fund
• Franklin India Short Term Income Plan
• Franklin India Ultra Short Bond Fund
• Franklin India Income Opportunities Fund

Together these schemes have an AUM of 30,854 crore as on March 31, 2020. Notably, these are the very schemes which in the past had to create segregated portfolio for its exposure to downgraded papers of Vodafone Idea and Yes Bank.

What led to the move?

According to a statement to investors from FTMF, "Despite several measures taken by the Reserve Bank of India (RBI), the liquidity in certain segments of the corporate bond markets has fallen-off dramatically and has remained low for an extended period. In this scenario, mutual funds are facing unprecedented liquidity challenges due to a variety of factors-rising redemption pressures due to heightened risk aversion, mark to market losses following a spike in yields and lower trading volumes in the bond markets. These factors have together caused a significant and worsening liquidity crunch for open-end mutual fund schemes investing in corporate credits across the credit rating spectrum."

The schemes had to resort to continuous borrowing to fund redemptions during this time, and were unable to repay the borrowings through sale of portfolio securities due to the prevailing market environment. The Investment manager did not believe it was prudent to continue funding redemptions through potentially increasing levels of borrowings.

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FTMF follows a high-risk high-return strategy for the above mentioned funds - Meaning a major part of its portfolio is exposed to lower rated securities (rating below AAA). The market disruption due to the virus outbreak has impacted these securities the most.

Under conditions of high redemption pressure, mutual funds sell their liquid assets to meet the demand, leaving the portfolio highly exposed to illiquid assets.

Thus, investors who choose to stay invested are at a disadvantage here.

Anticipating continued liquidity stress to the funds, the fund house thought winding up the scheme is the only viable option for the unitholders to minimize erosion of value.

Table: Details of schemes being wound up

What does it mean for investors of these schemes?

Investors of these schemes will not be able to purchase/redeem investment, switch to other schemes or do systematic transactions. In short their funds will be locked. The fund will not charge any management fees for the funds that are being wound up.

The fund house will rely on coupon payments, maturity value of underlying securities, and selling of securities at realisable value. While the fund house expects to realise most of the proceeds as per maturities, there may be some low rated securities that may even default on the due date. The fund house may create segregated portfolios for such securities and pay back as and when the money is realised.

It will be prudent to check the average maturity of portfolios of each fund and expect major repayment within that period.

What should investors in debt funds do?

Debt mutual fund Investors are not as confident, due to incidents of exposure to toxic papers in the past. This event could make them even more wary about their investment in debt schemes. As a consequence, there may be some panic selling in other debt schemes by investors worried about their funds getting locked.

However, instead of taking any hasty decisions, it would be a great idea to check your funds for the quality of assets it holds.

Choose a fund house that follows prudent investment process and stringent risk-management system. In these uncertain times, it would be wise sticking to liquid funds and overnight funds for the fixed-income part of your portfolio. Alternatively, if you prefer safety of capital, invest in Bank fixed deposits.

Our friends at Quantum Mutual Fund have highlighted the secret behind their debt management strategy which has helped them provide safety and liquidity to investors when it comes to investing in quantum funds. Don't Worry, Quantum Liquid Fund always aims for Safety and Liquidity

The way ahead...

While the fund house has done this to protect investors' interest, it has made the funds illiquid from the investors' point of view. Many investors may lose faith in debt funds for their short-term goals.

Going further, investors may have to consider liquidity risk due to AMC action, while investing in any high credit risk oriented debt funds.

It is time for the regulator to step up and clarify the illiquidity part for other debt schemes out there to investors. Moreover, it needs to provide a framework of strict guidelines to restrict fund managers from putting investors' hard-earned money at risk by exposing them to low rated securities for higher yield.

Meanwhile, AMFI has assured investors that a majority of the fixed income fund assets is invested in superior credit quality securities, and the schemes have appropriate liquidity to ensure normal operations. It further stated that the industry remains fully committed to the investors' interests and there is no need for them to panic and redeem investments.

Author: Divya Grover

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Unnerving movements for debt mutual funds investors!

Just last week my colleague, Divya explained the fiasco at Franklin Templeton Mutual Fund, which took a decision to abruptly wind down six debt mutual fund schemes, namely:

• Franklin India Low Duration Fund
• Franklin India Dynamic Accrual Fund
• Franklin India Credit Risk Fund
• Franklin India Short Term Income Plan
• Franklin India Ultra Short Bond Fund
• Franklin India Income Opportunities Fund

In all, the above debt mutual fund schemes had an AUM of Rs 30,854 crore as of March 31, 2020.

The fund house cited, "severe market dislocation and illiquidity in the fixed income space" caused by the COVID-19 pandemic, as the reason behind the decision.

Investors in these schemes are now left in the lurch: they cannot sell (nor buy) these funds and will have to rely on the fund house to get back their hard-earned money. Investors will have to hold their investments in these schemes until liquidity is available to the mutual fund house by either selling securities in the fund's portfolio or receiving maturity proceeds.

Currently, a fact is, not just Franklin Templeton Mutual Fund, but debt mutual fund schemes of many other fund houses are have a remarkable exposure to stressed assets.

According to portfolios disclosed on March 31, 2020, mutual funds collectively held Rs 1.38 trillion of exposure to debt securities issued by Non-Banking Financial Companies (NBFCs). Approximately Rs 51,000 crore of the exposure in debt securities has a maturity profile of less than 3 months; and now, mutual funds fear that there will be defaults.

NBFCs and other corporate borrowers claim that they do not have enough liquidity to fulfil their obligations and have requested for additional time. Given that, rating downgrades from rating agencies look likely.

However, some companies are playing smart: they are approaching the Courts to prevent a rating downgrade, plus seeking a stay on sale of pledged shares. Of course, they are well within their right to approach the judicial authority or Courts and contest.

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But the capital market regulator, seems to be in no mood in offering them any leeway. On the contrary, the regulator is asking the mutual fund industry to act against the issuer of securities who are possibly carrying high credit risk; facing asset quality problems.

Delays in repayments would mean the creation of more side-pockets by mutual funds. And in my view, more the losses investors suffer, more frustrating it will be for mutual fund houses and their investors. Eventually retail and High Net-worth Individuals, particularly, will lose confidence and may not be keen to invest in debt funds.

If you are wondering what has gone wrong, here's everything you may like to know about liquidity, credit risk and the exposure of mutual funds to corporate debt in the present scenario.

If you remember, the capital market regulator had mandated large corporations to source at least 25% of their borrowings from the bond markets from the beginning of FY 2019. This move was expected to deepen Indian bond markets and reduces the stress on banks. Just a year later, the same move is proving fatal for companies that went to the bond markets to raise money.

Now that the COVID-19 lockdown has forced many business units to shut off temporarily or operate much below their optimal operational capacity with a skeletal staff, companies, including the large organisations that relied heavily on debt markets, are finding it difficult to honour maturity claims on Commercial Papers (CPs), Non-Convertible Debentures (NCDs), and Bonds.

They were hoping for an 'at-par treatment' with Banks when the Reserve Bank of India (RBI) offered a moratorium period to borrowers. But the RBI circular came to them as a shocker. The devil was in the details.

On March 27, 2020, the RBI issued a notification allowing a three-month moratorium on all outstanding term loans and working capital facilities on account of disruptions caused by the outbreak of coronavirus. This circular did not cover around 10 thousand NBFCs, who mainly depend on CPs, NCDs, and Bonds for their funding requirements.

As far as NBFCs are concerned, the RBI has already provided them with a liquidity facility through the banking channel. The RBI directed banks to utilise funds infused under Targeted Long Term Repo Operations (TLTRO) facility to invest in 'investment-grade' CPs, NCDs, and Bonds issued by NBFCs. Also, RBI mandated banks to allocate 50% of Rs 50,000 crore of liquidity introduced by way of TLTRO 2.0 to small and mid-size NBFCs and small finance banks.

But NBFCs seemed not too happy with just liquidity and many of them are now approaching courts to prevent rating downgrades. This is not a best practice for the industry, although fund houses may be well within their rights to contest.

Recently, Indiabulls Housing Finance was successful in receiving the interim order from Delhi High Court, throttling any coercive action against the housing finance company for its inability to repay its bondholders. The Delhi High Court will hear the case further on May 19, 2020.

This has added to the worries of mutual fund houses that now fear other NBFCs will follow the same path.

The capital market regulator, only recently (a few days ago) following the three moratorium by RBI (due to disruptions caused by COVID-19 pandemic) has relaxed the valuation norms for debt and money market instrument held by mutual funds vide a circular dated April 23, 2020, wherein it states as under:

• Based on assessment, if the valuation agencies appointed by AMFI are of the view that the delay in payment of interest/principal or extension of the maturity of a security by the issuer has arisen solely due to COVID-19 pandemic lockdown and/or in light of the moratorium permitted by Reserve Bank of India (RBI) (vide notification no. RBI/2019-20/186, dated March 27, 2020) creating temporary operational challenges in servicing debt, then valuation agencies may not consider the same as a default for the purpose of valuation of money market or debt securities held by Mutual Funds.
  
  However, in the scenario, as stated above, if there is any difference in the valuation of securities provided by two valuation agencies, the conservative valuation shall be accepted.

But then what is the point of coming up with these valuation norms as an afterthought, and not in close synchronisation when the RBI came with its notification a month ago?

The damage now is already done and companies are anyways approaching the Courts to prevent a rating downgrade.

Let's say shares of a company are pledged and to recover the proceeds -- if they cannot be sold due to a court order -- then such lending would be as good as unsecured lending.

Also, why should that not be construed as an instance of deviation from the stated fundamental attributes of a debt mutual fund scheme? After all, mutual fund investors invest in debt fund schemes taking into account a certain level of risk. Change in the risk profile of a scheme is a change in the fundamental attribute/s.

According to India Ratings, NBFCs having the asset base of Rs 500 crore to 5,000 crore, largely fall between "A" and "BBB" rating categories.

The mid-path could be a decision on payment or deferring the payment in consultation with all stakeholders, including debenture trustees. The industry will require a blanket resolution because a case-to-case resolution approach is cumbersome and may create more chaos.

Unless the RBI takes a clear stance on NBFCs and other financial institutions, mutual fund houses are likely to feel the heat of redemptions. Suppose, there's no further statement issued by the banking sector regulator; mutual funds will have to be prepared to handle large-scale defaults, which might look inevitable. After all, a majority of NBFCs' customers are retail borrowers and they enjoy a moratorium on the EMI payment for 3-months. This has been the trickiest part for NBFCs.

While COVID-19 outbreak has been the genuine reason for the potential defaults this time, asset-liability mismatches of NBFCs are well-known. Many NBFCs have gone overboard with cheap credit available during stable market conditions. Their credit underwriting has been questioned widely. The industry has also witnessed belly-up instances such as IL&FS and DHFL. Many mutual fund houses have burned their fingers badly in such defaults.

At the time of writing this piece, to ease the liquidity pressure on mutual funds, the RBI today decided to provide a special liquidity facility of Rs 50,000 crore for mutual funds. Under this facility, the RBI will conduct repo operations of 90 days tenor at the fixed repo rate. This will be on-tap and open-ended, and banks can submit their bids to avail funding on any day from Monday to Friday (excluding holidays). The scheme is available from today i.e., April 27, 2020, till May 11, 2020, or up to utilization of the allocated amount, whichever is earlier. The Reserve Bank will review the timeline and amount, depending upon market conditions.

The RBI has stated further that the liquidity support availed under the Special Liquidity Facility for Mutual Funds shall be used by banks exclusively for meeting the liquidity requirements of mutual funds by, 1) extending loans; and (2) undertaking outright purchase of and/or repos against the collateral of investment-grade corporate bonds, CPs, debentures and certificates of Deposit (CDs) held by mutual funds.

Having taken this measure, keep in mind that it does not make investing in debt mutual funds risk-free. Considering the prevailing investment environment, you should stay away from mutual fund schemes whose portfolio characteristic appears compromised. Also, avoid credit risk funds and corporate bond funds as they are likely to be more vulnerable amidst the financial crisis followed by COVID-19 pandemic.

As a thumb rule: Choose mutual fund schemes from fund houses that follow prudent judicious investment processes and stringent risk-management systems.

In these uncertain times, it would be wise sticking to liquid funds and overnight funds while considering debt funds.

Our friends at Quantum Mutual Fund have highlighted the secret behind their debt management strategy which has helped them provide safety and liquidity to investors when it comes to investing in quantum funds. Don't Worry, Quantum Liquid Fund always aims for Safety and Liquidity.

As with all financial matters, better be safe than sorry!

PS: If you wish to select worthy mutual fund schemes, I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect.

Additionally, as a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.

Each fund recommended under FundSelect goes through our stringent process, where they are tested on both quantitative as well as qualitative parameters.

Every month, PersonalFN's FundSelect service will provide you with insightful and practical guidance on equity mutual funds and debt schemes - the ones to Buy, Hold, or Sell.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

Author: Rounaq Neroy

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Last month, SEBI had asked credit rating agencies not to consider any delay in payment of interest or principal loan amount arisen solely due to the nationwide lockdown conditions as a default.

The stress in the Indian mutual fund industry due to the pandemic impact deepened after Franklin Templeton MF decided to wind down six of its debt schemes. The lack of liquidity and redemption pressure compelled FTMF to take the extreme step.

In this economic environment, Mutual Fund houses are concerned about companies that are likely to delay and default in payments. Many companies have sought deferment/rescheduling of payment due to COVID-19 related disruptions. In order to minimize the resultant damage, market regulator SEBI recently provided temporary relaxation in valuation norms for instruments mutual funds hold.

SEBI has asked valuation agencies to avoid treating delays in payment of interest/principal or extension of maturity of a security as default for the purpose of valuation of money market or debt securities held by Mutual Funds, if it has been caused solely due to COVID-19 pandemic lockdown and/or in light of the moratorium permitted by RBI.

[Read: Will Mutual Fund Houses Act Against Companies Approaching Courts To Prevent Rating Downgrade Amidst COVID-19?]

"In view of the nationwide lockdown and the three-month moratorium/ deferment on payment permitted by RBI, a differentiation in treatment of default, on a case to case basis, needs to be made as to whether such default occurred solely due to the lockdown or loan moratorium", SEBI circular said.

SEBI has stated that in the above mentioned scenario, if there is any difference in the valuation of securities provided by two valuation agencies, the conservative valuation shall be accepted. This revised norm will be in effect until the RBI's period of moratorium.

However, AMCs shall continue to be responsible for true and fairness of valuation of securities.

Mutual fund houses have to mark the value of their assets based on valuations provided by valuation agencies appointed by AMFI.

At present, a debt or money market security is classified as 'Default' if the interest and/or principal amount has not been received on the day such amount was due; or when such security has been downgraded to 'Default' grade by a credit rating agency. Default denoted that the security is below investment grade.

This leads to mark down of the respective security and thereby impacts NAV of the scheme.

SEBI's move provides some relief in this regard. It will ensure that all fund houses follow a uniform approach while dealing with defaults/delay due to COVID-19.

Will it make investment in debt fund safe?

SEBI has not yet provided any moratorium on commercial paper and corporate bond repayment. According to a report published in Livemint, Rs 1.5 trillion worth of commercial paper and corporate bonds will be maturing in the first quarter.

As mentioned earlier, AMCs shall continue to be responsible for true and fairness of valuation of securities. But in the absence of rating downgrade from valuation agencies, fund houses cannot side-pocket their exposure to a defaulting company. Therefore, we may still see some write-offs if the AMC finds recovery to be difficult even after the relaxation period.

COVID-19 has impacted businesses across sectors. Some sectors such as NBFCs were under stress even before the pandemic. The default risk has thus amplified.

The relaxation of valuation would delay the issue, but downgrades would arise subsequently. Spike in number of side pockets (by fund houses) may thus become imminent.

My colleague, Rounaq, rightly mentioned yesterday, losses the investors suffer will be directly proportionate to the stress, pressure mutual fund houses and their investors will face. Eventually retail and High Net-worth Individuals, particularly, will lose confidence and may not be keen to invest in debt funds.

What should investors do?

In these uncertain times, it would be wise sticking to liquid funds and overnight funds for the fixed-income part of your portfolio and avoid funds that take higher credit risk. Alternatively, if you prefer safety of capital, invest in Bank fixed deposits.

Choose a fund house that follows prudent investment process and stringent risk-management system.

Our friends at Quantum Mutual Fund have highlighted the secret behind their debt management strategy, which has helped them provide safety and liquidity to investors when it comes to investing in quantum funds. Don't Worry, Quantum Liquid Fund always aims for Safety and Liquidity.

SEBI has time and again taken steps to tighten norms for debt funds. As an investor, if you take portfolio risks, align it with your own risk appetite and financial objective.

PS: If you wish to select worthy mutual fund schemes, I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect.

Additionally, as a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!

Author: Divya Grover

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Coronavirus or Covid-19 is showing no signs of receding. On the contrary, the number of cases is increasing by the day and the situation is rather depressing, as almost every region of the world and country is infected.

Sadly, there is no antidote or a vaccine conclusively developed to fight this deadly pathogen yet. And according to the World Health Organisation (WHO), Coronavirus will be with us for a long time. Most cases are still in the early phase of the epidemic and some countries which were affected early in the pandemic, are now seeing a resurgence in the number of cases, said the WHO Chief.

COVID-19 is truly playing havoc and may be followed with a financial crisis owing to the lockdowns imposed to contain the spread. The risk of global recession undeniably looms large. "This crisis is like no other", as what the International Monetary Fund's (IMF), Chief Economist, Ms Gita Gopinath wrote in the foreword to the World Economic Outlook, April 2020.

Graph 1: The virus has spread even to Indian equities

The graph above depicts the S&P BSE Sensex falling off the cliff and investors' wealth being eroded. Since the all-time high of the S&P BSE Sensex (42,273.87 points made on January 20, 2020), we have fallen more than -25% and overall sentiments seem downbeat and volatility has heightened.

On a year-to-date basis, Indian equity is down nearly -23.2% (as of April 27, 2020), while gold -- with uncertainty looming around the world -- has exhibited its sheen and demonstrated its trait of safe haven and an effective portfolio diversifier, clocking nearly +5.0% absolute return as of April 27, 2020.

Graph 2: YTD Performance of key asset classes

The graph above validates the importance of tactical asset allocation. The key lesson here is: all asset classes will not necessarily move in the same direction (up or down) always - over the long-term; some may even move in the opposite direction as what we have seen in the recent past (in the case of equities and gold).

As we (the world) continue to fighting COVID-19 and the aftereffects of it are conceivable, a further correction cannot be ruled out and the bottom is unknown. COVID-19 is likely to impact corporate earnings amidst a time when India is already facing slowdown blues. As people are quarantined, demand would remain muted and inflation risk will begin to surface, particularly in food prices.

So, although the current levels offer a decent value-buying opportunity, skewing your portfolio completely to equity as an asset class could endanger wealth creation. In such times you, as an investor, need to follow tactical asset allocation while you aim to generate wealth.

Tactical Asset Allocation with Quantum Multi Asset Fund of Funds

To invest sensibly in the current times, you need a Multi-Asset Fund that invests in mainly three asset classes: equity, debt and gold; and is truly balanced.

Among the plethora of Multi-Asset Funds, the Quantum Multi Asset Fund of Funds (QMAFOF) incepted on July 11, 2012, is truly balanced and holds well-diversified portfolio (across the three key asset classes: equity, debt and gold) at all the times -- unlikely many of its peers who swayed by the excess exuberance in equities, lost sense, and eroded investors wealth.

Table 1: Asset Allocation of Quantum Multi Asset Fund of Funds

The Scheme predominantly invests in the units of Equity, Debt / Money Markets and Gold schemes of Quantum Mutual Fund. Currently, the following schemes are used to gain exposure to a particular asset class:

For equity - Quantum Long Term Equity Value Fund, Quantum Nifty ETF

For debt & money market instruments - Quantum Liquid Fund, Quantum Dynamic Bond Fund

For Gold - Quantum Gold Fund (ETF)

The Units of any other Equity and Debt / Money Markets scheme launched by Quantum Mutual Fund from time to time would be eligible to be part of the above asset allocation components.

Although QMAFOF aims to invest predominantly only in the schemes launched by Quantum Mutual Fund, QMAFOF may seek to invest in the units of similar schemes of other mutual fund houses in case of any investment and regulatory constraints that arise that prevent the Scheme from increasing investments in the schemes of Quantum Mutual Fund.

The investment objective of Quantum Multi Asset Fund of Funds is, "to generate modest capital appreciation while trying to reduce risk (by diversifying risks across asset classes) from a combined portfolio of equity, debt/money markets and gold schemes of Quantum Mutual Fund"

QMAFOF benchmarks it against the Crisil Composite Bond Fund Index (40%) + S&P BSE Sensex Total Return Index (40%) + Domestic price of Gold (20%).

Being a fund of fund, this benchmark is most suitable to compare QMAFOF's performance. The unique combination clubs together the relatively risky assets with other stable asset classes in the portfolio.

Backed by an astute investment strategy, taking the relative valuations between asset classes into consideration such as Price-to-Earnings relative to historical averages; the relationship between earning yield to bond yield relative to historical averages; and macroeconomic factors prevailing globally and within India, the two fund managers of QMAFOF, namely Mr Chirag Mehta (MMS - Finance, M.Com, and CAIA with over 13 years' experience in research and investments) and Mr Nilesh Shetty (B.Com, MMS -Finance, and CFA with collectively 16 years in equity markets), have generated respectable returns for investors.

Table 2: Report card of QMAFOF versus some of its peers

Even as the equity market is panting for breath attributable to COVID-19 and volatility has intensified, QMAFOF due to its sensible asset allocation to equity, debt and gold through its underlying portfolio, has fared relatively better than some of the peers.

ICICI Prudential Multi-Asset Fund, Axis Triple Advantage Fund, HDFC Multi-Asset Fund, and UTI Multi-Asset Fund, on the other hand, have all eroded investors wealth posting double-digit negative returns (see Table 2) in this downturn. Some of these schemes have fared well during upswings by keeping to the allocation to equities high, but on the downside, they have not managed the risk very sensibly. Investors, as a result, have experienced a roller-coaster ride in the journey of wealth creation.

A multi-asset fund, ideally, is expected to be truly balanced and sensibly allocate its assets whereby the downside risk of one asset class is compensated by the positive returns of the other asset classes.

Here are five good reasons to invest in Quantum Multi Asset Fund of Funds

1. You gain from a diversified portfolio across asset class which, in turn, reduces risk and optimizes returns.
2. You do not have to worry about portfolio rebalancing; the fund manager will astutely do it for you at regular intervals in the endeavour to achieve the set-out investment objective of the fund.
3. Portfolio tracking will be easy for you instead of tracking 10 different schemes
4. You will benefit from the lowest expense ratio in the category
5. And above all, Quantum Mutual Fund's strong research capabilities across various asset markets - equity, debt and gold, -- with robust investment processes & systems followed at the fund house.

Suitability of Quantum Multi Asset Fund of Funds

QMAFOF is a perfect fund for investors looking to tactically diversify the portfolio with a single fund across equity, debt and gold, plus leave the aspect of rebalancing to the discretion and expertise of the fund manager.

Furthermore, the fund is appropriate for investors seeking long term capital appreciation, who have a moderately high-risk appetite, and an investment time horizon of 3 to 5 years.

It is the best time to invest in the Quantum Multi Asset Fund of Funds. Valuation-wise, Indian equities look attractive and there appears to be a decent margin of safety (with a high return potential if the equity markets ascend).

Similarly, given the uncertainty surrounding the world, gold is expected to display its lustre. The economic uncertainty surrounded by the COVID-19, GDP growth rates being revised downwards, easy monetary policy action and stance followed by central bank across the world, geopolitical tensions, trade tension, and increased stock market volatility are likely to keep spotlights on gold.

Likewise, with credit risk getting amplified, it makes sense to have exposure to a pure Liquid Fund (that does not take exposure to Commercial Papers issued by private entities). Now that policy rates are already lowered by RBI to address growth concerns, it does not make much sense to take exposure to the longer end of the yield curve; it could prove less rewarding and risky (may encounter high volatility) in the foreseeable future. Deploying your hard-earned money is short-end of the maturity curve, would be far better.

By investing in Quantum Multi Asset Fund of Funds, you will be able to balance the risk better with a sensible investment strategy in place.

Just as an excess drug dosage cannot treat COVID-19, your investment portfolio, too, needs just a fair amount of diversification to clock optimal risk-adjusted returns in the journey of wealth creation.

Go ahead and consider investing in Quantum Multi Asset Fund of Funds.

Happy Investing!

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Author: Rounaq Neroy

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Despite the rally we recently witnessed, the market mood continues to be sombre due to the pandemic crisis. FPI outflows from the Indian market persisted in the current month as well, while the recent fiasco at a popular fund house also dented investor sentiments.

It is difficult to predict how this situation will unravel eventually. Though the pandemic has impacted both large and smaller sized companies, small and mid sized companies could be the most affected.

However, quality names even in these segments could perform well over the long run. Therefore, you should stick to only quality names across different market capitalisation and invest via a well managed mutual fund that focuses on growth through diversification.

HDFC Mid-cap Opportunities Fund (HMOF) is one such mid cap fund that looks to invest in mid cap stocks with sound financial strength and reasonable growth prospects.

Graph 1: Growth of Rs 10,000 if invested in HDFC Mid-cap Opportunities Fund 5 years ago

One of the most popular funds in the midcap category, HMOF's asset size is the largest as compared to its peers. However, HMOF has shown no constrain when it comes to delivering superior performance. The fund has a track record of generating above-average returns across market conditions. Over the last 5 years, HMOF has generated returns at 4.5% CAGR as compared to 1.9% CAGR generated by its benchmark Nifty Midcap 100 - TRI, thus generating an alpha of around 2.5 percentage points CAGR. The fund has made well use of diversification to mitigate downside risk and generate decent lead over the benchmark index.

Table: HDFC Mid-cap Opportunities Fund's performance vis-a-vis category peers

*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

Though HMOF has trailed some of the other popular peers in the mid cap category, it stands strong in the list of mid cap funds. The fund has constantly outperformed the benchmark by a noticeable margin across time periods.

Some of the other top performers in the category are Axis Midcap Fund, Invesco India Midcap Fund, and DSP Midcap Fund.

The fund has not only demonstrated its ability to generate superior returns for its long term investors, but has been reasonable when it comes to managing volatility and curtailing down-side risks. In terms of risk-adjusted returns, HMOF has outperformed its benchmark by a significant margin and also stays ahead of most of its peers.

Investment strategy of HDFC Mid-cap Opportunities Fund

Categorized as midcap fund, HMOF is mandated to invest minimum 65% of its assets in equity and equity related instruments of mid cap companies. Accordingly, HMOF invests in stocks of predominantly mid-sized companies, which have reasonable growth prospects at acceptable valuations. The fund also holds significant exposure in smallcaps along with moderate exposure in large caps as well as cash and debt.

It follows the bottom-up approach to identify high quality businesses for the long term. The stocks are bought primarily for the strengths of company fundamentals rather than the strength of the macro-economic indicators.

The fund manager resists from following market momentum and holds each of his high conviction stock for the long term.

Graph 2: Top portfolio holdings in HDFC Mid-cap Opportunities Fund

As on March 31, 2020,HMOF held 75 stocks in its portfolio, with no individual stock having exposure of more than 5%.Popular mid cap names like Aarti Industries, Balkrishna Industries, Trent, Ipca Laboratories, and Voltas, etc. appeared in its top portfolio holdings. The top 10 stocks constitute close to 32% of its assets.

The fund's portfolio is primarily skewed towards Banking and Finance sectors which together constitute around 17% of the portfolio. Auto ancillaries, Pharma, Chemicals, and Industrial Products are the other prominent sectors with allocation of around 9-11% each.

Suitability

HMOF's performance over longer time periods has been commendable, where it has generated decent long-term returns for its investors as compared to the benchmark, though it has lagged behind some of its peers. Its focus on timely realization of growth potential of stocks at fair valuation can help it generate strong returns while also minimize the downside risk. However, its aggressive mandate makes it prone to high volatility. This makes HMOF suitable for investors with high risk appetite and a long term investment horizon.

Editor's note: The last few years have not been among the best for equity mutual funds. While most funds have underperformed or are struggling to match the returns of the benchmark, there are few funds that have the potential to constantly generate alpha for its investors. And we have identified five such high alpha generating funds, in our latest report 'The Alpha Funds Report 2020'. Do not miss our latest research finding. Get your access to this exclusive report, right here!

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Author: Divya Grover

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Last week the mutual fund industry was jolted by the news of Franklin Templeton MF winding down six of its debt schemes. The fund houses cited high redemption pressure and lack of liquidity due to COVID-19 as the reason behind the move.

There has been a rush of redemption in the debt market due to high volatility and uncertainty caused by the outbreak of pandemic. The stress is more evident in high-risk category of securities where liquidity has dried up. Notably, the schemes that were wound up belonged to the high credit risk category.

The recent FTMF fiasco led RBI to take note of the situation and step up to build confidence in the capital market.

On April 27, 2020, RBI announced the opening of a special liquidity facility (SLF-MF) worth Rs 50,000 crore to ease liquidity pressure on mutual funds.

Under SLF-MF, RBI will conduct repo operation of 90 days tenor at the fixed repo rate. Banks can avail funds under this facility between April 27, 2020 and May 11, 2020 or up to utilization of the allocated amount, whichever is earlier. RBI will review the timeline and amount, depending upon market conditions.

Banks have to utilise the funds availed under this exclusively for meeting the liquidity requirements of MFs by:

• Extending loans, and
• Undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs.

The liquidity support under this would be eligible to be classified as held to maturity (HTM) even if it goes beyond the 25% limit of total investment in the HTM portfolio.

Will banks come to the aid?

For banks, availing funds at a lower rate (repo rate) and using it to purchase investment grade, which generally carry higher interest, and holding them till maturity seems like a good opportunity, but they may not be as enthusiastic to come to the aid of MFs.

You may recall that few days ago, RBI came out with a similar liquidity window worth Rs 50,000 for NBFCs. Of these, 50% of funds had to be dedicated towards investment in investment grade bonds, commercial paper, and non-convertible debentures small and mid-sized NBFCs and MFIs.

NBFCs who have been dealing with liquidity crunch for quite some time now is one of the worst affected sectors with rising risk of bad loans amid the COVID-19 outbreak.

As a result, the first tranche of the operation worth Rs 25,000 crore conducted few days ago received bids for just Rs 12,850 crore.

Similarly, the stress in debt mutual fund segment is not new - some categories of debt funds have been facing redemption pressure ever since the IL&FS debacle came to light. Banks may be reluctant to lend to mutual funds with higher exposure to lower quality papers, which have been lacking in liquidity.

If banks do lend to MFs it may be limited to those with good quality papers. This will not serve the intended purpose of the facility.

Many mutual funds investing in credit-risk grade securities may have offloaded good quality papers to meet the high redemption and may be now left with only lower quality papers. Risk aversion in banks has magnified due to rising fear of bad loan pile up. Hence, banks may not be keen to accept lower quality papers as collateral.

Besides, some mutual funds may already have high borrowing rate availed to fund redemptions and further borrowing may not be a viable option for them.

Thus, if redemption pressure continues, liquidity strain will continue in schemes carrying higher exposure to lower rated securities. Hence, RBI may have to come out with alternative steps to deal with issue that would infuse liquidity directly to mutual funds rather than relying on banks.

Word of caution for investors in debt funds

RBI and AMFI have assured investors that stress in capital market is confined to the high-risk debt MF segment at this stage; the larger industry remains liquid.

In the current market volatile and uncertain environment, it would be advisable to stay away from credit risk schemes. However, do not resort to panic selling. Doing that will have an exponentially negative effect on funds, primarily those having exposure to moderate and low rated assets.

Redemption pressure may force the fund managers to sell good quality papers in the portfolio in the secondary market and pile up exposure to low rated assets because it will be difficult to liquidate at fair value.

Keep in mind that debt funds are not risk-free. Investment in debt funds carry various risks relating to liquidity, credit quality, and interest rate. Therefore, before investing in debt funds understand the various risks involved and invest in schemes where the portfolio risk aligns with your own risk appetite and financial objective.

Moreover, choose a fund house that follows prudent investment process and stringent risk-management systems.

In these uncertain times, it would be wise to stick with liquid funds and overnight funds for the debt part of your portfolio as they are highly liquid and carry lower risk.

Our friends at Quantum Mutual Fund have highlighted the secret behind their debt management strategy, which has helped them provide safety and liquidity to investors when it comes to investing in quantum funds. Don't Worry, Quantum Liquid Fund always aims for Safety and Liquidity.

PS: If you wish to select worthy mutual fund schemes, I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect.

Additionally, as a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!

Author: Divya Grover

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Many investors park their surplus money in debt schemes in an attempt to earn higher returns than Bank FDs. However the recent incident of Franklin Templeton MF winding down six of its debt schemes has dented investor sentiment and sparked speculation about the safety of their investments.

The news came as a shocker to the investors because the six schemes, the fund house, and the fund manager had a good performance record. Investors in the wound up debt schemes of FTMF are now left with no choice but to wait for the fund house make repayments.

If you are one of them, surely you want to know about the timeline of payouts from the respective schemes.

Here is what you should know first...

Before returning the money to unitholders, the fund will have to repay the borrowings by the respective schemes that was taken to fund the heightened level of redemptions. Keep in mind that the repayment of borrowings does not impact the value of money to be returned to the unit holders, though it can delay the start of pay out to unitholders.

The repayment of the borrowings that the fund has taken, along with the cash flows it receives in the respective schemes based on the maturity of the underlying securities in the portfolio as well as coupon receipts will determine the payout to the unitholders.

Moreover, the fund will seek pre-payment from issuers of the underlying securities and will look to sell portfolio holdings in secondary market at fair value.

Table 1: Maturity profile of wound up FTMF schemes

Franklin India Ultra Short Bond Fund (FIUBF) and Franklin India Low Duration Fund (FILDF) are the schemes with shorter maturity. If you are an investor in this scheme, you may expect a significant payout within 2-3 years. However, to recover the entire amount you may have to wait up to 5 years.

If you are wondering why a scheme with average maturity of just 0.44 years and 1.45 years will take around 5 years to repay the entire amount?

This is because the maturity of some underlying securities is much longer (around 4-5 years), even though the schemes belong to low duration category. Additionally, the schemes have borrowings in the range of 6.5% and 8.5% respectively, which have to be repaid first.

Whereas, if you are an investor in Franklin India Dynamic Accrual Fund (FIDA), Franklin India Short Term Income Fund (FISTIP), Franklin India Credit Risk Fund (FICRF), and Franklin India Income Opportunities Fund (FIIOF) your wait will be longer. These schemes primarily invest in medium to long duration securities.

These funds had to sell a number of their short term and liquid securities in the portfolio to meet redemptions. Hence, to get a significant payout from these schemes you will have to wait at least 4-5 years. The year wise expected cumulative cash flows is given in the table below.

Notably, FIIOF is the longest duration fund from among the six funds that have been wound up. It will only be able to repay a very small portion (5%) in the next two years.

Another key reason that could delay the payout from these schemes is the high borrowing rate. FISTIP has 28% of its assets as borrowings, FIIOF has 26%; while FICRF also has significant 16% as borrowings. Furthermore, factors such as credit issues or payment delays faced by any of the investee companies could negatively impact cash flows.

Table 2: Cash flows expected by FTMF across different time period

Many of the securities with longer maturities have regular interim cash flows and features such as interest rate resets or call/ put options, which significantly reduce the effective maturity and the same has been factored into the calculation of the Macaulay Duration.

FTMF said that it would actively explore opportunities with a goal to facilitate repayment prior to the maturity of the portfolio investments. To do this it will seek prepayment from the issuers of the underlying securities and look to sell the securities in the secondary market.

However, the current market scenario is rife with risk aversion and illiquidity. The fact that wound up schemes have high holding of lower rated securities, FTMF will have to wait for the market conditions to go back to normal to liquidate the portfolio at the earliest, without causing value erosion for investors.

[Read: RBI Steps in to Take Some Pain Off Mutual Funds. Will It Help?]

Way ahead for debt fund investors

Keep in mind that debt funds are not risk-free. Investment in debt funds carry various risks relating to liquidity, credit quality, and interest rate. Therefore, before investing in debt funds understand the various risks involved and invest in schemes where the portfolio risk aligns with your own risk appetite and financial objective.

In this market environment, it would be preferable to invest in instruments issued by government and public sector enterprises, and stay away from those having high exposure to private issuers.

At PersonalFN, we arrive at top rated funds using our SMART Score Model. If you wish to select worthy mutual fund schemes, I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect.

Additionally, as a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!

Author: Divya Grover

This article first appeared on PersonalFN here.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

The Indian equity markets are on a rollercoaster with the uncertainty surrounding the COVID-19 pandemic. It's been a nerve-racking experience for investors and wealth has been eroded.

As we continue to battle COVID-19 with lockdown 3.0, on a year-to-date basis the S&P BSE Sensex is down -23.9% as of May 5, 2020, (see Table 1 below).

Table 1: Wealth erosion across market cap segments

Balanced Hybrid Funds that are supposed to be balanced and protect downside risk have gone on to erode investors' wealth by seldom maintaining a 'fair balance' and displaying unreasonable love and exuberance for equities plus for taxation reason -- to be treated as an equity-oriented fund. (see Table 2 below).

Similarly, many multi-asset funds that hold the mandate to invest with allocation across three asset classes i.e. equity, debt and gold with minimum 10% in each have posted negative returns (see Table 2 below).

Table 2: Report card of Balanced Hybrid Funds and Multi-Asset Funds

ICICI Prudential Multi-Asset Fund, HDFC Multi-Asset Fund, and UTI Multi-Asset Fund, in particular, have not lived up to the expectation and the trust evinced by investors (going by their AUM size). Not just are their recent returns amidst the outbreak of COVID-19 crisis unappealing, but even the 3-year and 5-year compounded annulaised return is nothing to vie for. This is because they haven't been able to sensibly allocate to the three key asset classes: equity, debt and gold, and play the investment strategy astutely.

On the other hand, the Quantum Multi-Asset Fund of Funds (QMAFOF) has depicted true balance backed by its sensible investment strategy arrested the downside risk and relatively fared better vis-a-vis its peers over 3-year and 5-year time periods.

The Quantum Multi-Asset under normal circumstances by maintaining 25%-65% exposure to units of equity schemes (vide Quantum Long Term Equity Value Fund, Quantum Nifty ETF); 25%-65% exposure to units of debt and money market instruments (vide Quantum Liquid Fund, Quantum Dynamic Bond Fund); 10%-20% in units of gold schemes (vide Quantum Gold ETF); and up to 5% in money market instruments, Short-term Corporate Debt securities, Tri-Party Repo, Repo/ Reverse Repo in Government securities and Treasury Bills has been able to generate modest, yet appealing returns than the rest, and mitigated the risk by diversifying across asset classes: equity, debt and gold.

Historically it is proved that all classes never move in the same direction -- up or down -- at the same time. There could be times when certain asset classes perform better than the other and/or show an inverse relation to another (see Table 3).

Table 3: Here's how various asset classes fared per calendar year

If your multi-asset fund strategically allocates between equity, debt, and gold sensing the pulse of each asset class, maintains balance, and takes calculated risk sensible wealth creation is possible.

In the on-going COVID-19 crisis, equities will remain volatile, but given the sharp correction, there are and will be, enough long-term value-buying opportunities with a decent margin of safety.

Gold in such uncertain times would continue to gain all the attention. Easy monetary policy action and accommodative stance to address growth concerns, a record-high debt-to-GDP ratio, trade war tensions, geopolitical tensions, the potential risk to the inflation trajectory mainly due to food prices, increased stock market volatility, and the U.S. Presidential election in November 2020 are some of the factors expected to work in favour of gold. The precious yellow metal will demonstrate its trait of being a portfolio diversifier, a hedge (when other asset classes fail to post alluring returns), and command a store of value.

And speaking of debt & money market instruments, with exposure to highly rated papers and predominantly government securities, will act as a stabilizer.

A unique aspect of QMAFOF is that it has always taken relative valuations between asset classes into consideration, such as:

• Price-to-Earnings relative to historical averages;
• The relationship between earning yield to bond yield relative to historical averages; and
• Macroeconomic factors prevailing globally and within India

It is this wide-ranging and sensible approach that has helped QMAFOF to protect against the downside risk and reward its investors better than many of its peers. The fund managers, Mr Chirag Mehta (MMS - Finance, M.Com, and CAIA with over 13 years' experience in research and investments) and Mr Nilesh Shetty (B.Com, MMS -Finance, and CFA with collectively 16 years in equity markets), have strategically moved in and out of the aforesaid asset classes wisely recognising their upswings and downswings.

[Read: Why Tactically Invest Across Asset Classes amidst COVID-19 with Quantum Multi-Asset Fund Of Funds]

The choice is completely yours: to stay invested in a 'Balanced Hybrid Fund'/ Multi-Asset Fund that does not show true balance and keep harming your health and wealth; or make a sensible move and switch over to Quantum Multi Asset Fund of Funds that is truly balanced and has sensibly generated wealth for investors without the shrieking experience of a rollercoaster.

Wish to invest in Quantum Multi Asset Fund of Funds? Click here.

Happy Investing!

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Author: Rounaq Neroy

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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