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Liquidity crisis Q&A with Fund Manager Monday, Apr 27, 2020

Liquidity crisis Q&A with Mr. Pankaj Pathak, Fund Manager, Fixed Income


Q) Post the recent liquidity crisis in debt funds, do you think that investors will again lose faith just like what we saw post 2008 financial crisis?

Since the IL&FS default in September 2018, there have been a series of events which have created a trust deficit for investors in debt mutual funds. At this time one needs to question the way debt funds are sold, the basis on which funds are selected and the general behavior of yield hunting in debt funds.

In a broader sense considering the overall Asset Allocation, the role of fixed income is to provide diversification from equities. In bad times when equities fall we expect fixed income exposure to provide some stability to the portfolio. But with high exposure to credit/ lower rated debt which usually moves in tandem with equities, it fails to fulfil this role. Thus it becomes essential to remain extremely risk averse while selecting debt funds.

In our opinion, quality of portfolio and robustness of process should have greater importance than brand name or size of AUM or AMC. I hope investors will take a much much closer look to these parameters than just going for higher yield in debt funds.

We have always maintained that the returns should be provided by equity funds and safety by debt funds. The latest debacle shows that debt funds have not fulfilled this basic requirement.

Q) If investors have debt funds in their portfolio what should they do now? Is my money stuck is the most common questions which is asked by investors?

Investors should not panic and should focus on their asset allocation goals. However it would be prudent to re-evaluate risk in the debt portfolio

For a long time now we have been seeing the writing on the wall and have been advising investors to be extra cautious of credit and liquidity risks and to prioritize safety and liquidity over returns in their debt exposure. Given the level uncertainty in the economy, it has become even more important now.

Q) Do you think the current scenario will lead to redemption pressure in equity funds as well?

These types of events could cause extreme risk aversion among investors. So we cannot rule out the possibility of redemption pressure on equity funds as well.

Q) What are the steps you are taking to safeguard investors' interest?

We have been stressing on the important aspect of the investment objective of each scheme and whether the funds are being managed 'True to Label'. In Quantum we follow this principle to align the fund's portfolio with its stated objective.

In case of liquid fund, the objective is to first keep your money safe and liquid and then try to earn a sensible return. Thus Quantum Liquid Fund prioritizes safety and liquidity over returns and invests only in government securities and few top AAA rated PSUs which are selected after careful assessment of their credit quality. Both of our debt funds do not take any private credit exposure.

In past few weeks we have reduced the exposure to even AAA rated PSUs in both our debt funds - Quantum Liquid Fund and Quantum Dynamic Bond Fund. Both the funds now hold a very large proportion of the portfolio in Government Securities and Treasury Bills.

We believe that we will be holding this conservative stance for a long time as we do not expect things to stabilize anytime soon.

Q) Experience tells us that History never repeats but rhymes. Healthcare crisis which could snowball into a financial crisis due to COVID-19 outbreak and extended lockdown - what will be the world like post COVID-19? Do you foresee a change in how people do investment/saving etc?

This crisis has exposed us to risks that we have been ignoring for a long time. In that sense it will definitely change our behavior towards consumption and saving. People would probably look to have a larger safety net before spending on consumption.

Similarly, with respect to investments, the focus might shift to have a truly diversified portfolio than just trying to maximize returns.



This Q&A was first published on www.Moneycontrol.com on 27th April, 2020.


Product Labeling
Name of the SchemeThis 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
Quantum Long Term Equity Fund
Investors understand that their principal will be at Low risk
Quantum Dynamic Bond Fund

An Open Ended Dynamic Debt Scheme Investing Across Duration
• Regular income over short to medium term and capital appreciation

• Investment in Debt / Money Market Instruments / Government Securities
Quantum Long Term Equity Fund
Investors understand that their principal will be at Moderate Risk
*Investors should consult their financial advisors if in doubt about whether the product is suitable for them.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

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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.