The Covid-19 pandemic and various discussions around financial emergency are going on. Can all these impact mutual funds as well?
Yes, all these can heavily impact the fund industry. While the pandemic has been showing its impact, the situation is also a sort of financial emergency, as about 80 per cent of all economic activities have come to a standstill amid the coronavirus-induced lockdown. Besides, it resulted in various companies and labour-dependent factories shutting down their operations and labours going back to their hometowns. Against this backdrop, it will take a while to rebuild customer confidence. One does not know when people will start going to work or to buy refrigerators, televisions, cars etc or when exports and imports will restore. So, the lockdown and the entire pandemic will affect everything.
Companies have various expenses, like employee cost or interest cost on the borrowed money, etc., which will continue to rise. Now, if a company keeps incurring expenses but its income is not generated, then its earnings will definitely get impacted.
Quite recently, we have witnessed a majority of debt fund investors simultaneously pulling out their investments. This was because investors started doubting the underlying companies' profitability and therefore, their ability to repay their obligation to these funds. Now owing to all these factors, many companies may face rating downgrades and negative valuation impacts. So, this is a financial emergency.
And no one can predict when the economy will restore and how many adjustments will be required towards restoration. The markets do not like uncertainty and therefore, they will get impacted but what would be the exact impact that we can only guess.
Having said that, I am hopeful that we will get out of this situation and after a few years, we will look back to it as an opportunity - which was full of threats.