Mutual funds: A brewing scam?

The next (if not current) big story is the possible collapse of many Indian mutual funds. As usual, the victims are hapless retail investors.

Forget about equity funds, many of which are heading to extinction in the current stock market crash.

This is about fixed income MFs – the sort that are supposed to be risk-free, investing only in bank certificates of deposit and the best commercial paper. With the Government exempting income from MFs from tax, it seemed a better option than taxable bank deposits, for the same risk.

Little of repo-eligible assets


Thinking they only had liquidity problems but prime assets, the RBI innocently announced it would offer a repo line to MFs through banks. That was when the cat came out of the bag. The repo window drew bids of just a fraction of its size, clearly showing distressed MFs held little of repo-eligible assets - the bank CDs, which the RBI was willing to bridge finance.

It turns out that many liquid, money market and debt funds have put their money not in first class manufacturing companies with established businesses and credit histories but real estate ventures – creatures of the recent boom in the sector – with untested managements and stuck with plenty of unsaleable semi-finished projects. In present market conditions, they are obviously in no state to retire their liabilities to MFs.

How did they get there? On paper, the stricken MFs have invested only in ‘AAA’ paper. But the ‘AAA’ label is not what it used to be. Ask any credit rating agency.

Predictably, there are loud and powerful voices pleading, demanding a bailout.

The IBA too (strangely) has added its penny’s worth as has the ICICI Bank Chairman, Mr K.V. Kamath.

If this is agreed to, the RBI will, in effect, repo junk, toxic – whatever you call them – MF assets and may still have to be done for the nowadays familiar ‘systemic risk’ argument. Of course, it will be justified saying even the US Fed is doing it.

Considering what’s happened (whoever imagined debt funds could go belly up), it is fortunate that provident and pension fund reforms stalled. They propose investing in equities to improve returns.

We must thank our stars for the (much criticised) delay. Otherwise, we might have had the spectre of ‘hot shot’ fund managers losing in short order the life’s savings of millions of ordinary people in the market crash.

That would have been tens of thousands of crores of rupees bill for the Government.

Source: TheHinduBusinessLine