You have invested in a fund house which has invested in the ILFS paper. Now your question is ‘should you exit the scheme(s) which has other ILFS paper or should you stay on in the scheme.

It is not a question that is easy to answer. Let us say ILFS is about 5% of the corpus of the fund in which you too have exposure. You decide not to redeem because you heard experts say that it is a temporary phenomenon. I was surprised to hear that it is a temporary problem. The closest I can say is “I do not have enough data to say whether it is a temporary problem or a permanent problem’.

Now let us assume that the company now DEFAULTS..AND your fund has to provide for more ..suddenly the value of your fund could fall by 9%. How? Simply because some of the people believed that they would cut their losses and flee.

So it is a double edged sword. If you exit, you have taken the 25% haircut. If you stay you could look smart..if the money came and the 25% hair cut was restored. However, if you stayed and there was a further 25% haircut, you could lose more.

AS OF NOW WE DO NOT HAVE ANY DATA to take a decision either way. So you have to shoot in the dark. In other words you are playing blind. Take your pic.

What could be the size of the problem? Even that is not clear.

The man who was running ILFS used to run it …well I do not wish to name him or his style. Those who know him, know bfsi, know what I am talking about. ILFS used to be so lavish – not sure how many of you remember the remote controlled blinds in their office. Or the amazingly big tea/coffee vending machines. I did not see any part of ILFS and feel that ‘this is sustainable’. When they signed up for selling a life insurance product, I balked at the cost structure. It looked surreal.

Many of us used to be surprised at the borrowing rate. The gap between the gilt and AAA was so large once, that I remarked “it is a AAA but does not behave like one’. Maybe they knew it was not.

The one defense all the investing mutual funds have is “we did a due diligence…but Subra it was rated AAA not very long ago (when we invested).

The investors are HOPING that the big, rich, real shareholders like LIC, Hdfc will HAVE to bail it out

Will they bail out? why should they put good money after bad money?

To me fund houses saying “we depended on the CARE rating”….”but Subra an nbfc defaulting is dangerous, and it could be terrible”

I do not like what I am seeing. I have no clue how much more blood letting has to happen. I guess this is called “halal”. Maybe the ‘Jatka’ has happened….now it is the amount of blood that we will be able to see……

The luck part is that the size of the problem is small as far as the Mutual fund industry is concerned. They have already taken a haircut. They may take a little more. Maybe they will recover a part of it.

It takes a brave government to let the problem be solved by the market. This Gov will step in and do some hotch-potch. Will it be done clinically like in case of Satyam or will it linger and die?

If you are an employee looking for a change of job makes sense. If you are a lender, be ready for some more hair cut. If you are a shareholder, maybe the worst is over.

  1. Spreads on Dewan and IB were worser than ILFS compared to Gsec. Is there something brewing there too ? Also do you feel that one individual should be running a company for more than 2 decades ? We do have Aditya Puri on one side and Ravi P on the other end of the spectrum.

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