I like the equity market – the good shares go up, and the shit shares go down. There is very little that somebody can do to hide the shit. The same is not true in today’s big debt funds and big bulging balanced funds.

Let us say a company goes and gets itself a good investment grade rating. Now do not be naive to ask how is this possible. If you do not know that, read no further.

Then it takes this rating and goes to some nice flexible mutual fund. Helped by a bank, a broker, etc. Then they place the bonds of the company with the mutual fund. It is rated you see?

So the company raises funds which is used to pay off the bank. The bank (presumably a private sector bank with more reporting worries than a psu bank).

Now the company has replaced the bank’s loan with bonds. These bonds are held by the mutual fund. For a few quarters the interest payment happens regularly. Again easy to understand more than enough money has been raised – a part of the proceeds is being used to pay off the interest.

Now there is heat on the mutual fund from the auditor / vigilant trustee (!) / …and the bonds have to be sold. Well there is pressure to sell the bonds. The mutual fund goes to the corporate and says “I have suffered enough..and I cannot hide it longer…”. So fine, the corporate asks him to hold on for sometime. So the CFO holds on..and the Life insurance arm of the same group offers to buy the bonds. He has a 30 year view you see. By the time the shit hits the roof (actually 2 months)….he is holding the baby.

So the bond moved from the portfolio ot the HNI customers (who were watching), to the Retail customers, to the retail customers who faithfully buy bonds and bond funds!

Ha now to launch an AIF. HNI customers are not all that stupid, but there is enough wool in their heads. Pulling it over their eyes is not so difficult. All you need is a good looking salesman who will pander to their ego.

done.

So are the NPA shifting from bank portfolios to the debt fund portfolios?

Are mutual funds hiding poor portfolios in ‘others’? by not naming the company?

A default will impact say a week’s interest income – especially for big funds?

Should debt fund portfolios be subject to audit and write offs be disclosed separately?

Should there be a forced disclosure (immaterial of amount) for a dramatic fall in ratings?

Should ratings be from 2 agencies? assuming that 2 cannot be simultaneously ‘managed’ ?

Should MF be really allowed to invest in lower grade securities?

What about life insurance companies? should we have far more disclosure?

Why am I asking all these questions?

If bank Npas are so worrying..how come bond NPAs are not so worrying?

It is surprising that the RBI is not forcing big companies to borrow from the market? Well, will the banking regulator weaken the banks? Ha! paapi pet ka sawal…

there is some hope here..but that is not sufficient..

http://mfcritic.blogspot.in/2018/02/three-cheers-for-sebi.html