In just 3-4 months, DHFL had witnessed a severe drop in its credit rating from “AAA” to “D”.
As you might be aware, DHFL Pramerica Mutual Fund was a joint venture (50:50) between DHFL, and Prudential Financial Inc. (PFI). As DHFL ran into financial troubles, it decided to offload its stake to its JV partner. This month, i.e. in June 2019, DHFL defaulted twice on its debt repayment schedule.
And that’s the story in a nutshell.
Recently, DHFL received SEBI’s approval to exit the mutual fund business.
Exchange filing of DHFL stated:
We wish to inform you that SEBI vide its letters June 25, 2019 addressed to DPAMPL has granted its prior approval for proposed change in controlling interest of DPAMPL and for amendment in trust deed under the applicable provisions of SEBI (Mutual Funds) Regulations, 1996 subject to certain conditions.
Mr Ajit Menon, CEO of DHFL Pramerica Mutual Fund, briefed the media after DHFL received the approval, and said, “We are happy to receive the final approval from SEBI. We now need to complete a few more formalities, including giving a load-free exit window to investors, in line with the SEBI requirement, for change in control and other fundamental attribute changes.”
Should existing investors exit from DHFL Pramerica Mutual Fund schemes?
Exposure to DHFL papers has severely impacted the NAVs of many debt schemes of DHFL Mutual Fund which include DHFL Pramerica Medium Term , DHFL Pramerica Floating Rate Fund, and DHFL Pramerica Low Duration Fund among others. Exiting from them at this juncture, especially when there seems to be some light at the end of the tunnel, may not be advisable.
As remains the question of other schemes, one should analyse the performance after Pramerica takes over the mutual fund business completely. If it introduces best global practices and robust investment processes & systems that results in improvement of the schemes’ performances, you may continue with them; else, finding alternatives is the right choice.
Lessons to learn from the DHFL episode…
Mutual fund industry players have plenty to learn from DHFL Mutual Fund investing in DHFL papers and the subsequent exit of DHFL from the mutual fund business.
While DHFL takes credit of having honoured the debt obligations worth Rs 40,000 crore, it fails to explain why its mutual fund invested in its papers in the first place, especially when the company was sailing through tough times. In fact, we have observed this in the case of Reliance Nippon Mutual Fund’s case—its schemes too invested in Reliance ADAG group’s troubled companies.
Hence, for mutual fund advisors and investors it’s imperative to do a background check of the promoter of a mutual fund house before investing in any of its schemes.
Some business groups in India are always in the limelight for their irrational business expansion, poor record of corporate governance, and hasty decision-making.
Do you think mutual funds floated by such corporate houses can ever manage money judiciously? If you invest in them, you might be in for a nasty surprise eventually.
As against this, some business houses in India are known for their exemplary governance. Barring a few exceptions, the mutual fund houses floated do follow stringent investment systems and processes. They don’t try to grow their AUM by launching NFOs senselessly but manage sensibly.
Pick mutual funds carefully…
If you are concerned about investing in a mutual fund scheme that could fulfil your/client’s financial goals, take the time to research and choose it wisely. Pay attention to various quantitative and qualitative factors when selecting schemes for the portfolio.
Further, be mindful to your/client’s risk appetite, investment objectives of the scheme, financial goals, and the investment time horizon before goals befall.