Is a cap of MF redemption justified?
The tremors of the events in the US and Europe were felt as far as Singapore and Hong Kong where sovereign guarantees had to be issued to prevent flight of bank deposits.
We are living in extraordinary times. The events that have unfolded globally have been far worse than anything the best risk managers could ever plan for. The deviation from the mean ��� in terms of change in human behaviour, widening of credit spreads, tendency to hoard cash and the scale of panic ��� has been of such magnitude that even the synchronised effort of multiple governments , central banks and policymakers have had little palliative effect.
The tremors of the events in the US and Europe were felt as far as Singapore and Hong Kong where sovereign guarantees had to be issued to prevent flight of bank deposits. It is easy to talk about Black Swans, but if everyone starts to budget for such multi-sigma deviations, portfolio construction will get too difficult and returns will tend to be quite sub-optimal , even on a risk-adjusted basis.
While a housing downturn in the US was an issue long talked about, the consequent devastating effect on far-flung credit markets like India was not in the realm of anyone���s imagination.
It is common wisdom that if all depositors withdraw their money in a bank together, leave aside the liquidity
issues, the solvency of the institution will be at risk. Thankfully, for mutual funds the risk is one of liquidity alone.
In a marketplace where liquidity gets as tight as it did in the past few weeks, the value of bonds, commercial papers and certificate of deposits, regardless of the underlying credit rating, tends to erode and their sale becomes difficult. A fire-sale would necessarily mean that the best price cannot be secured .
It is appropriate, fair and equitable that the fund houses take decisions that are for the collective good of all investors. Prima facie, a cap on redemptions is unpalatable, but investors will need to appreciate the underlying cause and the context in which such an unsavoury decision was taken.
The RBI���s timely liquidity injection and its aggressive 250 bps CRR cut have helped substantially ease the tightness in the system over the past week and hopefully, mutual funds would not face a similar predicament in the near term.
The tremors of the events in the US and Europe were felt as far as Singapore and Hong Kong where sovereign guarantees had to be issued to prevent flight of bank deposits. It is easy to talk about Black Swans, but if everyone starts to budget for such multi-sigma deviations, portfolio construction will get too difficult and returns will tend to be quite sub-optimal , even on a risk-adjusted basis.
While a housing downturn in the US was an issue long talked about, the consequent devastating effect on far-flung credit markets like India was not in the realm of anyone���s imagination.
It is common wisdom that if all depositors withdraw their money in a bank together, leave aside the liquidity
issues, the solvency of the institution will be at risk. Thankfully, for mutual funds the risk is one of liquidity alone.
In a marketplace where liquidity gets as tight as it did in the past few weeks, the value of bonds, commercial papers and certificate of deposits, regardless of the underlying credit rating, tends to erode and their sale becomes difficult. A fire-sale would necessarily mean that the best price cannot be secured .
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If any portfolio manager is forced to do so, it is detrimental to the interests of all unit holders, including those that stay invested. It is appropriate, fair and equitable that the fund houses take decisions that are for the collective good of all investors. Prima facie, a cap on redemptions is unpalatable, but investors will need to appreciate the underlying cause and the context in which such an unsavoury decision was taken.
The RBI���s timely liquidity injection and its aggressive 250 bps CRR cut have helped substantially ease the tightness in the system over the past week and hopefully, mutual funds would not face a similar predicament in the near term.
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