Investors should know that losses in debt funds might be rare, but not impossible
02-Sep-2015 •Dhirendra Kumar
Last week saw some rather unusual happenings in a couple of mutual funds, something which Indian investors are not used to. JP Morgan Mutual Fund limited redemptions in two of its debt funds, the JP Morgan India Treasury Fund and the JP Morgan India Short Term Income Fund. There was a sharp drop in the NAV of these two funds because one of the companies--Amtek Auto--whose bonds that they had invested in revealed financial issues that it had hitherto concealed. The rating agency which had rated the bonds withdrew its rating and as a result, the regulatory norms mandated that the fund had to write off its entire investment in the bonds.
As a result, one of the funds lost 3.4 per cent value and the other 1.7 per cent. In India, investors in debt funds are not used to this. They assume--on the strength of strong precedent--that debt funds don't make losses because of credit quality issues. However, the truth is that it can happen. In fact, in a country with such a huge problem of non-performing assets with banks, it's nothing but a pleasant surprise that out of ₹9 lakh crore of bond investments by mutual funds, such a problem has occurred in just one issue from one small company.
One could blame the funds or the rating agencies, as I'm sure some investors will. However, it must be noted that this issue arises from what is said to be concealment of information by the company. Unfortunately, investors will have to reconcile themselves to the fact that such events, although rare, cannot be eliminated completely. It's a larger regulatory and compliance issue that will always be there at some level. However, holistically, the scale is something that is not a serious problem. This is the kind of thing that diversification is a cure for.