The NBFC selloff may have come as a shock for many, but Value Research CEO Dhirendra Kumar cautions against going for the panic button. NBFC exposure in mutual funds to equity is not alarming, he told ETNow.
Edited excerpts:
Let us break the myth around liquidity because we have seen the central bank do its bit. There is that issuance of OMOs as well. So, it clearly seems that the government is doing its bit when it comes to liquidity concerns and easing the market, so to speak?
Liquidity concern is one thing, but restoring confidence is another. When you have a big credit event like IL&FS, it is bound to have a contagion effect. I think it requires a very swift corrective action.
Taking it to a logical end and giving a clear road map is going to happen. Otherwise, we have seen the erosion of confidence. Investors so far had the understanding that most liquid funds will never go down in value on an overnight basis that has happened. Only some funds have been able to escape that wrath.
Apart from that, looking at equity — that was the fixed income fund — many have been able to manage the problem significantly because of their design. Many FMPs have that exposure and investors cannot do anything about it, maybe that is a good structure to have. It also raises concerns about credit rating, the meaning of it and market actions, who is ahead of the curve or are they expected to be ahead of the curve and who should warn. When opinion changes about a credit, what is the mechanism of communicating it to investors? Can investors do anything about it in a relatively illiquid market? So it raises a lot of concerns. I think restoring confidence with some significant and swift action is necessary today.
So as an investor, when you know that the mutual fund where you have got your hard-earned money has a high exposure to NBFCs, what is it that you do? Do you redeem or do you have faith in the fund manager because they also will apply their minds and as it is there is something that they would be working on that sector rotation?
Open end fund structure design itself is a mechanism whereby investors can take a call and we see the gradual underperformance. We have seen fund managers having exposure to public sector banks, which has not worked out nicely. But all NBFCs are not equal, it is only a small segment.
I have been looking at the exposure of mutual funds to those NBFCs and that is not a significant overall portfolio exposure. Investors are benefiting from the design of mutual funds which have diversification and are open ended funds. You have a choice to exit anytime. So I would say NBFC exposure in mutual funds to equity is not alarming.
Even if it is, it is not something which is going to have a big drag on the fund performance.
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ET Markets
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