In view of the recent debacle in FMPs, how safe will it be to invest directly in the secured NCDs of housing finance and manufacturing companies?
- Chandrakant
These two are quite related things. In some recent incidents, FMPs with exposure to certain securities, which defaulted, have ended up suffering. To specify, these FMPs held the securities of Zee group's infrastructure company's bonds, which were backed by the collateral of Zee Entertainment's shares. These incidents resulted in FMPs delaying payments to investors. No doubt, the entire scenario is quite disappointing. Nevertheless, I do not think that investors will lose their entire money.
Coming to your question about the direct ownership of NCDs, if you directly own one that eventually goes wrong, then your entire money may get stuck. However, in the case of a mutual fund, at par with the current situation, only a part of your money will get affected. So, in this way, the diversification benefit associated with a mutual fund can help you spread your risks, thereby providing cushion to your money. It's better to keep away from investing directly in NCDs unless they are of companies that people swear by, such as Sundaram Finance, HDFC, just to name a few. Such companies are run very conservatively, have a history of 30-40 years of honouring their commitments and worry about their solvency as well as their reputation.
Mutual funds are definitely facing a difficult time, as risk has visited fixed income funds for the first time in such a significant way. However, I still feel that this isn't going to translate into a contagion. Nowadays, everybody has become so risk-averse because of all these surprises that they think it's the end of the world. But it isn't so.
I would also like to add that an investor can do well without investing in FMPs. Out of 16 categories of open-ended debt mutual funds, you can well consider liquid funds, which I still feel are reasonably safe. Your investable universe can also have ultra- short-duration or short-duration funds. These three categories will end up making a reasonable return for you.
This article was originally published on July 03, 2019.
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