Not only that, 37.7% of its corpus was invested in assets with credit rating below AA (—). That’s just one instance;

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But the problem here is under the prevailing liquidity crunch, when the companies are struggling due to lack of funds, chances of they defaulting to make the payment is quite higher. Moreover, the situation aggravates further as many of these FMPs had a higher exposure on the real estate sector. For example, LIC MF FMP Series 35 had invested an unbelievable 86% in the construction sector. Not only that, 37.7% of its corpus was invested in assets with credit rating below AA (—). That’s just one instance; if one goes deeper, he can find many more such examples where fund managers have risked investors’ money by parking them in low-rated instruments. But then, they could to do it for the loopholes present in our regulatory system. As per the Securities and Exchange Board of India (SEBI)’s norms most of the FMPs disclose their portfolio once in six months (minimum requirement), which give them sufficient time to play with their portfolios in between.

However, as these debt papers are not very liquid in nature, default on part of the companies means the FMP is also bound to default, unless it gets a loan. But then with the cash pile of Indian banks witnessing lower levels and lending norms moving from strict to stricter, the matter has turned worse for the fund houses. On top of it, their over dependency on institutional investors has proven to be a curse. Institutional investors, who constituted the major part of the corpuses of fund houses, emerged as the first ones to pull their money on fears based on rumours. Approximately Rs.660 billion has been pulled out of debt funds in the month of October alone, damaging the liquidity position further.

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Source : IIPM Editorial, 2008
An Initiative of IIPM, Malay Chaudhuri and Arindam Chaudhuri (Renowned Management Guru and Economist).


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