Liquid funds carry no credit risk, no liquidity risk - True or False? Saturday, May 09, 2020
Ideally this should be True!
However, in past few years investors have lost their savings even in liquid which questions the way liquid funds are run.
In the past week we have conducted two webinars, shared our views with media and investors on the ongoing debt fund crisis. Why? Is our liquid fund in problem? NO! Did we do anything wrong? NO! A big NO.
However we are upset and proud at the same time. We are upset that investors have lost their money. Debt funds which are considered safe and liquid failed to payout to the investors when demanded. And we are proud we weren't one of them. We didn't let down our investors. We stood by our investment objective to ensure safety and liquidity for our investors' money.
Liquid funds or any other fund which is meant for short term goals ideally should avoid taking excessive credit or liquidity risk. The latest debacle shows that some debt funds have not fulfilled this basic requirement and took undue credit risk.
Why is taking risk in liquid funds so bad at all?
As the name suggest, liquid funds are short term fund that are meant to be liquid at all times. Which means that any security your liquid fund holds needs to be good enough (need to have enough credit) for buyers to buy when a fund manager wants to liquidate your funds, so he can pay you back. If the credit is poor quality, it becomes difficult to find a buyer.
Why would somebody take high risks in liquid fund?
Yield hunting!! Returns! Higher returns!! Liquid fund investors, were lured with higher returns. Investors fell for the temptation and parked their money which was probably meant for their contingency needs or their kid's school fees which is due in six months or some other short term goal.
In a good market, things were fine, everyone was happy. However it takes just one company to default, and everything collapses. Just like a house of cards. Because there is a negative sentiment which affects everyone around. This happened during IL&FS crisis. Even a small segment of the credit market can create panic.
Time to be clear and careful
Quantum has always being clear that returns in debt funds are capped and if we try to chase returns and ignore credit risk there is a possibility that you can even lose your principal amount.. There is a major downside to all these things and sadly the upside is capped, which simply doesn't make sense. Yield hunting with disproportionate risk doesn't make any sense.
Therefore, going forward what is more important for investors is to choose a liquid fund that aims to mitigate the issue of credit risks (risk of default) and liquidity risks (unable to liquidate/sell the assets to meet redemptions) by investing in safer and more liquid instruments.
Since COVID-19 has elevated the nervousness spell across market categories, we re-iterate to all investors that these are not the times, to try and earn some extra return from your fixed income investments. We believe that the sentiment in the debt market could turn adverse and that it may be prudent to be as risk averse as one can be in their investment portfolios.
Quantum Liquid Fund rightfully invest only in government securities, treasury bills and securities issued by a select few AAA rated Public Sector Undertakings (PSU) which are shortlisted under our proprietary credit research and review process. The fund aims to have very high liquidity, minimum volatility and near zero chances of capital loss (credit risk - risk of default of interest and principal).
|Name of the Scheme||This product is suitable for investors who are seeking*||Riskometer|
|Quantum Liquid Fund|
(An Open Ended Liquid Scheme)
|• Income over the short term|
• Investments in debt / money market instruments
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Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.