Should the big fall at Taurus MF worry investors?
If you had invested in Taurus Asset Management Co Ltd’s debt mutual fund schemes, you’d have incurred big losses. On 22 February, net asset values of four of its debt schemes fell 7-12% in just a day. Taurus Dynamic Income Fund — a long-term bond fund — was the worst hit as it fell by 11.82% in a day. Why? The credit rating of Ballarpur Industries — one of the companies in which its debt schemes had invested in — got downgraded on 22 February by India Ratings & Research, a credit rating agency. So should you be worried?
When you invest your money in an equity fund, it buys shares of a company and hopes that their prices go up. If you invest in a debt fund, your fund invests in debt scrips of companies and — in return — is paid interest. In simple words, debt scrips are loans given to different companies. Mutual funds are one of the biggest lenders to firms, apart from banks. In return, the companies pay interest to your debt funds. When the loan’s tenure is over, the company returns the principal back to your fund house.
According to India Ratings & Research: “The downgrade reflects delays in debt servicing by the company...” Calls and text messages to Waqar Naqvi, CEO of Taurus AMC and its fixed income fund management did not elicit a response. India Ratings & Research didn’t answer calls.
All mutual fund schemes, including debt funds, carry risks. That’s why they have the potential to give returns higher than traditional instruments such as fixed deposits. But it’s your fund manager’s job to mitigate the risks. For instance, a well-managed debt fund invests a large chunk in high rated securities, unless it is the scheme’s mandate to invest low-rated securities. Taurus Short-Term Income Fund and Taurus Dynamic Income Fund had invested close to 12% each in this scrip. According to the rules, your debt fund can invest up to 10% maximum in a single company’s scrip, but can increase it to 12% if it gets the trustees’ approval. This means that two of Taurus’ schemes had almost maximised it limits.
Gurgaon-based Ashish Chadha, a mutual fund distributor says that every mutual fund is vulnerable. But that doesn’t mean you should avoid debt funds. “You need to mitigate the risks and that is where a good adviser comes in.” Chadha advises investors to diversify amongst mutual fund houses.