{"id":184,"date":"2019-04-24T11:23:10","date_gmt":"2019-04-24T11:23:10","guid":{"rendered":"http:\/\/blog.certifiedfinancialguardian.com\/?p=184"},"modified":"2019-04-24T11:23:18","modified_gmt":"2019-04-24T11:23:18","slug":"are-mutual-funds-crossing-their-limits","status":"publish","type":"post","link":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/2019\/04\/24\/are-mutual-funds-crossing-their-limits\/","title":{"rendered":"Are Mutual Funds Crossing Their Limits?"},"content":{"rendered":"\n

Although, unwillingly, DHFL Mutual Fund<\/a> is flouting the group exposure norms set by SEBI. Three of its debt schemes have a concentrated exposure to DHFL\u2019s downgraded debt instruments, beyond a limit prescribed by the capital market regulator. <\/p>\n\n\n\n

Unfortunately, they are still open for\nsubscription. <\/p>\n\n\n\n

According to media reports, the market\nregulator has taken a note of this and brought this to the notice of the fund\nhouse. But as of now, no disciplinary action has been taken against it. The\nregulator has asked for a remedial solution from the fund house.<\/p>\n\n\n\n

What\nare the group exposure norms for mutual funds?<\/strong><\/p>\n\n\n\n

According to SEBI circular dated February 15, 2016<\/a>, Mutual Funds\/AMCs shall ensure that total exposure of debt schemes of mutual funds in a group (excluding investments in securities issued by Public Sector Units, Public Financial Institutions and Public Sector Banks) shall not exceed 20% of the net assets of the scheme. Such investment limit may be extended to 25% of the net assets of the scheme with the prior approval of the Board of Trustees.<\/em><\/p>\n\n\n\n

For\nthis purpose, a group means a group as defined under regulation 2 (mm) of SEBI\n(Mutual Funds) Regulations, 1996 (Regulations) and shall include an entity, its\nsubsidiaries, fellow subsidiaries, its holding company and its associates.<\/em><\/p>\n\n\n\n

What\nhappened in the DHFL case?<\/strong><\/p>\n\n\n\n

DHFL came into the limelight in September 2018 when DSP Mutual Fund<\/a> sold DHFL papers at a steep discount. Thereafter, independent credit rating agencies have slashed DHFL\u2019s ratings twice which not only raised the cost of borrowing for the company, but made the bonds more illiquid. <\/p>\n\n\n\n

According to AMFI data, average AUM of\nDHFL Pramerica in Q1, FY 2018-19 was Rs 23,137 crore which dropped to Rs 7,627\ncrore. <\/p>\n\n\n\n

On March 31, 2019, DHFL Pramerica Ultra Short Term Fund<\/a> held 29.5% of its assets in securities issued by DHFL. Similarly, the exposure of DHFL Pramerica Floating Rate Fund<\/a> to DHFL papers was 29.2% and that of DHFL Pramerica Medium Term Fund<\/a> was 36.7%. All these schemes lost more than 90% of their Assets Under Management (AUM) between March 2018 and March 2019. <\/p>\n\n\n\n

In December 2018, the fund house\nannounced its plans to exit the mutual fund business by selling 50% of its JV\nstake to Pramerica. <\/p>\n\n\n\n

If you remember, this excerpt was\nDHFL\u2019s reaction on its exit plans:<\/strong><\/p>\n\n\n\n

\u2018This is a strategic call\nby DHFL to focus more on our core business. We firmly believe this\nmove is in the best interest of all parties and will have a positive outcome for\nall stakeholders.\u2019<\/em><\/p>\n\n\n\n

When Pramerica had sounded optimistic\u2026<\/strong><\/p>\n\n\n\n

\u2018Our expanded investment demonstrates\nour deep commitment to this market and confidence in both our talented\nleadership team and robust investment process. We strongly believe that when\ncombined with the deep expertise and broad capabilities of PGIM, we are well\npositioned to serve our clients and to strengthen our competitive position in\nIndia.\u2019<\/em><\/p>\n\n\n\n

Mutual fund houses might exit their\nbusiness shrugging off their responsibilities, but distributors and mutual fund\nadvisors can\u2019t escape the wrath of investors when such unprecedented events\ntake place. <\/p>\n\n\n\n

What happened with debt schemes\noffered by DHFL Mutual Funds is a classic case of what lax players can do to\ninvestors\u2019 money and to distributors\u2019 reputation. <\/p>\n\n\n\n

Thus, investors must select mutual\nfunds cautiously. Similarly, advisors and distributors should be careful with\ntheir recommendations. Distributors, who may have recommended DHFL Ultra Short\nTerm Fund, might not have imagined that a fund house could mess up a scheme\ncoming from one of the steadiest categories. <\/p>\n\n\n\n

If you think that was just one off case, please note, Reliance Nippon Mutual Fund<\/a> has the highest exposure to debt securities issued by Anil Dhirubhai Ambani Group (ADAG) companies. Just a coincidence or are mutual fund houses deliberately utilizing investors\u2019 money to get their group companies out of trouble?<\/p>\n\n\n\n

In a nutshell:<\/strong><\/p>\n\n\n\n

Mutual\nfunds are subject to market risks<\/em>: A standard disclaimer for investors.<\/p>\n\n\n\n

Mutual fund advice is subject to reputation risk<\/em>: An implied disclaimer for distributors. <\/p>\n\n\n\n

So, IFAs should take all the necessary\ndue care before recommending mutual fund schemes to investors and follow high\nfiduciary standards. <\/p>\n","protected":false},"excerpt":{"rendered":"

Although, unwillingly, DHFL Mutual Fund is flouting the group exposure norms set by SEBI. Three of its debt schemes have a concentrated exposure to DHFL\u2019s downgraded debt instruments, beyond a limit prescribed by the capital market regulator. Unfortunately, they are still open for subscription. According to media reports, the market regulator has taken a note…<\/p>\n","protected":false},"author":3,"featured_media":187,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"cybocfi_hide_featured_image":""},"categories":[3],"tags":[],"_links":{"self":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/184"}],"collection":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/comments?post=184"}],"version-history":[{"count":2,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/184\/revisions"}],"predecessor-version":[{"id":188,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/184\/revisions\/188"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/media\/187"}],"wp:attachment":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/media?parent=184"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/categories?post=184"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/tags?post=184"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}