So our great regulator is trying to regulate the debt fund. First of all the regulator having to do so much of micro management is a clear indicator that the class is unruly. Imagine how many times in a year does the Principal of the school had to come to your class to read you the Riot Act? Just shows how unruly was the class.

Let us start at the basics. Mutual funds 101. A mutual fund can only invest in ‘marketable securities’. Let me explain this for the uninitiated. If Tata Steel wants Rs. 5000 crores for working capital can Invesco mutual fund give it a loan? NO. When Invesco wants to exit it should be able to sell the ‘loan’ in the market. So Tata Steel will be encouraged to issue debentures so that Invesco can get liquidity (partial or full) in the market without going to the issuer. ‘Marketable’ does not mean ‘traded regularly’ it just means that Invesco will get to sell the debentures without RECOURSE TO the issuer.

What really happens in the Indian context is we have another regulator called the Reserve Bank of India who has made no effort at developing the secondary market for debt instruments. Even national savings certificate, kisan vikas patra,…are not available online, forget other debt instruments. So ‘mutual fund’ debt schemes is a JOKE. Nothing short of a joke, because we have a lot of ‘marketable securities’ but no market price determining agency. There is no price discovery mechanism – like it is there in case of equity markets. If you want to buy 100 shares of TCS or 10,000 shares of TCS you stand in the SAME QUEUE. This is an awesome price discovery mechanism.

To regulate the mutual fund debt schemes, the STARTING point has to be to develop a vibrant, active wholesale and retail debt markets. THAT we have been hearing since 1980, but I don’t think it will happen till 3080. So let’s give that a pass.

Without a vibrant underlying market, it is IMPOSSIBLE for the Mutual funds to enter the market. Exactly why we don’t have a Real Estate Mutual fund with a full Real Estate portfolio. You have to see the norms with this background.

As there are not enough “marketable securities” available in the market, and the overzealous RBI will not allow mutual fund access to the call money market, the real big mutual funds have very limited scope in where to invest. So they went to Nbfc and lent money to them for short term, mid-term and long term. This allowed companies like DHFL to run a HUGE ALM. Nothing wrong as long as the music played. When the music stopped the people holding the parcel did not know what to do.

So Sebi comes in and makes new norms – all liquid funds should ‘mark to market’ all their portfolio. This will induct more volatility to all liquid funds and the rise will not be as secular as we think it used to be. This will mean some of the investors will be nudged to the overnight fund. So if you have money for 15 days go to a liquid fund, but if you have money for 5 days go to an overnight fund. In a liquid fund the exit load will be another dampener. Sebi also says that in case of loan against securities (which in the original definition is a banking product and NOT a mf product) the security should be 4x the loan (oops). Now if I gave you Rs. 100 as a deep discount bond (FMP?) it would anyway become close to 1.5 in 3 years. So if I took Rs. 150 as security, OBVIOUSLY I was a fool, and not a prudent banker. I should have ANYWAY taken 3X to really secure myself. If such basic stuff has to be taught to fund managers, I am wondering what they learnt in the IIT and IIM. Risk reduction is an important part of fund management. Sad that we needed a regulator to come and kick ass. Chalo, better late than never.

Some play of words like lien, pledge, non disposal,…have all been included under the Christian name. It is sad that this was being called a play of words. This was a case of cheating, but that has also been plugged. Playing with Other People’s Money comes easy for this over paid, over dressed, over prefumed class. Sad, and sick. ‘Honest banker’ and ‘Honest fund manager’ should not become oxymorons. I heard of one lender who had 100,000 shares of a particular promoter holding. Instead of cribbing that they had 1.5 times cover (like the guys who are being prosecuted did) this lender was selling 1000 shares a day. Over 100 trading days you can liquidate the protfolio – right? and go back to the borrower for the gap, if any. Well FMs are not so sharp or smart is it? How did this Nbfc being run by not very educated people act smartly? Simply like Taleb says “never trust an employee”. Sad, but true.

If I had my way as the FM the first thing that I will do is to develop a vibrant secondary debt market – only then does a M to Market make sense. Othewise people will start playing with the methodology. The next Sebi amendment in 2020 is to say “this is the ONLY uniform method of marking to market”. Sigh. Errant school boys. Oops. Errant school girls too.


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  1. There are 43 fund houses out there, if one demands 3 times the security for a loan there is always another who will be ready to do for 1.5.
    This is what a marketplace will do. So a SEBI ruling is necessary here for all 43 fund houses to toe the line.

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