Self-inflicted Losses of India’s Debt Funds
why do fund managers invest as if it is? Instead of betting on their ability to predict what Urjit Patel would do, it would have been better for investors if fund managers took a conservative view and decided that anything could happen.
This is not a unique event, some version of this happens almost every time the RBI does something unexpected. The root cause of such shocks is the way debt funds are marketed. What is inherently a capital preservation product is sold as a returns-maximising product. The potential investor is told that instead of choosing a fund for stability and predictability, they can chase perhaps 1% extra returns. That’s all there is at stake — the difference between the worst and best funds is rarely more than that range. You can listen to a sales pitch that says that a fund that has an annual return of 11% increases your earnings by 10% compared to one that has returns of 10%. Or, as is often the case with corporates who actually use such funds, you had ₹ 10 crore to park for maybe four months and it makes no material difference whether it became ₹ 10.40 crore or ₹ 10.44 crore. The important thing should be that in that effort to earn that extra bit, you didn’t end up a loss.
However, it does seem that on the investor side, and fund company side, there are way too many people who are focussed on excessive fine-tuning and optimisation. The fund industry seems committed to creating a variety of funds which serve no purpose except to bamboozle investors into looking frills rather than core of the product. Unless, there’s a fundamental change in this approach, events like last week’s disaster will continue to happen. Unfortunately, it does not look as if such a fundamental change will happen voluntarily.