Can a mutual fund keep a fixed deposit with a bank?

No.

Can a mutual fund keep a fixed deposit with a big corporate – say Tata Sons?

No.

Why?

Because mutual funds can invest ONLY in marketable securities. If they need liquidity they should go to the market and not the issuer. Great logic.

Then the question is : Should mutual funds invest in bonds in a country where the REGULATOR (S) is not allowing a nice deep debt market to develop? Look at the equity market. If I had bought Noida Toll Bridge at Rs. 25, yes it would have been foolish, but I always got a chance to sell it at various prices…now it may have hit the nadir. What happened?

Well I bought it at 25, but somebody found that at 24 the risk-reward ratio improved, so he bought, but somebody else sold. Similarly right down to Rs. 8.50 there is a continuous price discovery mechanism at work. Somebody thinks it is worth buying at a particular price. Sure, if the price goes to zero, there is a bigger loss, but people buy for the upside. Of course, downside happens.

If there was a secondary market (I hate this Wholesale and Retail debt) in the debt market, the Rs. 100 debenture of ILFS would have been quoting at 99, 98, 88, 77,….and all the fund managers would have got an EXIT.

When the regulator cannot ensure liquidity, there is no logic in allowing mutual funds to invest in bonds right?

Well I do not know but I am happy with equity mutual fund because I know that there is a solid, well regulated brilliant price discovery mechanism behind it. I find that lacking in debt funds. Sounds cruel, but if there is no brilliant secondary market for a great price discovery, how will you arrive at the REAL NAV? In fact this isĀ  what will hold up the Real Estate mutual fund becoming a big success. We need a good price discovery market for the mutual fund to develop.

Now does a small investor need a debt fund for the LONG TERM? NO. of course not. Well, I said small investor. If you need to invest Rs. 50,000 per month in debt, you can invest in a combination of PPF and Nps+ Nps lite. Remember four members in your family + one HUF means you have 5 PPF accounts. The limit is Rs. 1.5L * 5 i.e. 7.5L per year….do you need to invest MORE THAN THAT in the short term? If yes, look at a liquid fund. You may not need other debt funds….

Soch lo…

 

  1. Going by the current IL&FS mess, even liquid funds are reported to have been used for long term lending. Therefore, liquid funds must be renamed as ‘Gas Funds’ as gas escapes easily without leaving any trace.

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