Self-in­flicted Losses of In­dia’s Debt Funds

The Economic Times - - Finance & Commodities -

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.

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