IL&FS was an isolated case with no industry-wide impact on mutual funds, says Nimesh Shah, managing director and chief executive officer, ICICI Prudential Mutual Fund, the largest fund house in the country with assets under management (AUM) totalling ₹3.10 lakh crore. Investors put money in debt funds while looking for relative safety and hence, there is no point in taking very risky credit calls, he adds. Edited excerpts:
You have been elected as the chairman of Association of Mutual Funds in India (AMFI). From an industry perspective, do you think the IL&FS case could have been handled better?
The incident aforementioned, we believe, is an isolated one.
The way the issue transpired has shown how the market has matured. The AUM of debt funds clearly indicates that there has been no investor flight from debt funds.
We believe this is because investors have understood that when buying into a credit fund, there could be incidents as these, and the resultant NAV (net asset value) would be adjusted accordingly. Finally, it’s a testament of the regulatory investment guidelines working efficiently for the industry.
Do you think there is a need for fund houses to review their existing procedures in terms of internal risk evaluation and not be totally dependant on rating agencies?
Following the rating(s) provided by rating agencies is the first step of an evaluation process, which we think is a good methodology.
However, if these ratings provided by third party are not in line with our in-house view, we can always look into it, and should be in a position to justify our valuation. Ultimately, the NAV of MF schemes should reflect a fair valuation of the assets and it is our responsibility to deliver a fair NAV. One must understand that fair valuation is a debatable aspect. In case of IL&FS, there are multiple companies and each company would have its cash flow security and recovery capability.
In the hindsight, one can get wiser, but on a particular day, when the NAV is released, one aims to deliver a fair valuation.
Are MFs solely dependent on credit rating agencies for pricing debt instruments?
Inputs provided by rating agencies are only indicative in nature and acts as an aid in helping you take the final judgement.
As you said, the IL&FS exposure was a small one for the MF industry, so you do not see an industry-wide impact going ahead?
There is no industry-wide impact as such.
Only the schemes with those particular debt papers would be impacted, whenever there is any such issue. Our regulatory norms ensure that impact is limited to the scheme having such exposure and other schemes remain unaffected.
What is your advice to investors looking at the markets today?
This Diwali we have launched YehDiwaliSIPWali campaign and the thrust is on SIPs (systematic investment plans).
Over the course of next two years, investors should systematically invest through SIPs, considering the uncertainties in the market and with an investment horizon of at least five years.
Do you expect flows to continue?
The flows are likely to continue as there is a genuine shift in retail investors’ investment pattern from traditional avenues to capital market and mutual fund investments.
This is a good shift and such investments have effectively countered FII outflows. FIIs have been net sellers for last three months but markets have remained largely unaffected.
