Covid-19 Lockdown: Impact on Mutual Funds

R Basil

Q. How are investor sentiments during the COVID-19 pandemic? What response are you getting from the investors?

A: Overall,it is a fairly mixed bag of responses because on one side, there isthis set of apprehensive and anxious investors who do not see the light at the end of the tunnel, whereas the other set of investors are sensing an opportunity for investments in this kind of a market. So, as you see, it’s a pretty mixed trend, and it’s fairly premature for us to break the responses and suggest if this trend can continue well into April also because March usually is the annual year-end, and the quarter-end (period) where we usually see outflows in debt mutual funds,but that behaviour may not necessarily continue into the coming quarter.

Q. Do you mean thisis a wait-and-watch situation and that it will not be justified to say genuine inflows are missing in mutual funds at this moment?

A: Absolutely, as I said month-end, quarter-end and year-end redemptions all happen to be in March. So, it’s not fair to extrapolate that trend into the coming few weeks or months. There is some set of apprehensive behaviour stepping in, but as I said, it would be early to say if the outflows are increasing or the inflows have decreased based on that. I think we need to wait and watch for some more cues before seeing how the responses actually pan out.

Q.Do you think the 3-month moratorium is enough for markets?

A: For now, the 3-month period seems to be fair, given the fact that no one can really pinpoint how long the impact of the covid-19 outbreak lasts. If you take the example of China, where the crisis actually originated, it has been a nearly 2-3 month period, wherein they tried to resolve this medical emergency. Therefore, it is prudent for us to assume that the 3-month moratorium period seems to be okay. I’m sure regulators will take cognition of the covid-19 situation on how it pans out and announce additional measures if doing sois warranted.

Q. Any specific measures expected at this stage?

A: We have just seen the monetary policy decision announced in the last week of March and it has barely been a fortnight. It’s only fair to wait and watch how effective these measures are before announcing additional measures, at least on the monetary front.

Q. Do you think the LTRO announced to manage bond yields and contain the impact of FPI outflows would be enough at the current juncture?

A: So far, the TLTRO has auctioned INR 750 billion worth of money for 3 years, and the response has been phenomenal. We believe in waiting for this entire amount to be utilized and sensing the necessity if the need arises, we are pretty sure that the central banker may look to enhance these (TLTRO auctions) if found to be inadequate.

If an issuer misses the payment/coupon due to you during the moratorium period, will you factor this as a default? If yes, what happens? Will you sidepocket or write down the NAV?

A: The capital market instruments have been exempted from this moratorium, and it is only for the lenders; however, mutual funds are the investors. So, I do not really envisage this kind of a scenario at the current juncture.

Q. If any issuer where AMCs have invested requests for a restructuring of terms of investments, including payment due dates, will you allow? If yes, how will this work?

A: Nothing of such sort has happened so far.

Q. What is your advice to retail investors vis-a-vis investing in mutual funds? Should they continue investing in Systematic Investment Plan (SIP) or hold on until some clarity arises on the virus front?

A: If one has been investing in the market and has seen over the past fortnight or so how the markets have behaved, it is next to impossible for any investor to call for a market bottom, and therefore, continuing to stagger your investments at this point of time via SIPs or Systematic Transfer Plans (STPs), we believe,is the best suited in this kind of a market situation. So, we would certainly not advise any investor to discontinue their investments into mutual funds, whether equity or fixed income. Panic reactions seldom end-up being gainful or productive for the investor. So, it’s very essential to stick to your core and maintain your asset allocation and above all, continue your disciplined approach to all your investments.

Where do you see the bond yields, going forward, in case the moratorium is removed after 3 months? Also, what is your take on interest rates, going forward?

A:Firstly, on the government bonds side, there are lingering concerns over the slippage in the fiscal deficit adding to the supply burden of government bonds, which is why we expect government bond yields, specifically at the longer end,to be under pressure unless the Reserve Bank announces open market bond purchases or rather private placements, as the case may be. On the corporate bond side, given that the banking system has been comfortable on the liquidity and TLTRO, leading to demand from the banking fraternity, it looks like the bond yields should be anchored at the current levels; therefore, believe in the risk-reward basis – the short-to mid-end of the yield curve offers a better value proposition in this kind of a market scenario.


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