Fund homes are required by SEBI to classify the risk of each system as one of five levels: low, moderately low, moderate, moderately high, or high. But what exactly should we make of a structure whose risk level is described by the finance house as, say, ‘moderately low’? On the other hand, what should we label of Value Research or Morningstar telling us that the chance grade or risk rating of that scheme (relative to its peers) is, say, ‘average’?
It isn’t just their ambiguity: I would not rely on these brands as they largely stem from a small view of risk. I think that if we aren’t careful, these can lead us to make flawed assumptions about the riskiness of a scheme and, worse, act upon them. To demonstrate the perils of relying upon these risk rankings, I’d prefer to take the case of a particular structure whose risk rankings are currently poles apart from my assessment of its risk.
To be clear, this structure can be an extreme outlier: it would be difficult to find a scheme quite like this. However, the extremity of this example is what makes it beneficial to show the arbitrary nature of account-house risk ratings, and the restrictions of the methodology followed by entities such as Value Research and Morningstar. The scheme in question is a debt fund that has been around for over a decade. From what I could see, for the majority of its existence, there’s been a noticeable consistency in the manner that its maturity/ length of time and its credit profile have been handled.
- Lump sum loss of life benefits
- JMP Group Inc
- 18 Undefined IRR
- Chhattisgarh (Rs 58.73 to Rs 72.23)
- 48 See supra notice 10
- Some policies enable you to pay monthly premiums out of your money value
- The Terms of Reference of the Committee will be to
As respect to its performance, in each of the last 10 quarters, its return was above average (in comparison to its peers). In 3 of the last 6 quarters, its comeback was exceptional. The month of June In, this system offered a higher comeback than every non-gilt fund almost. Its return in June was also higher than its return in virtually any of the preceding a year. The account house has classified its risk as low’ ‘moderately.
On the other hand, both Value Research and Morningstar have presently trained with a risk quality/ ranking of ‘average’ and a standard ranking of 5 superstars (based on the performance of its direct plan, development option). So, what’s the nagging problem? As with some other schemes Just, over the past almost a year, this scheme saw a substantial fall in its AUM.
Consequently, there is a certain illiquid NCD in its profile, which it hasn’t been able to market off, whose proportion to the portfolio has zoomed up as the AUM has fallen. As on May-end, this NCD composed 71% of the scheme’s collection. As on June-end, this NCD comprised 87% of the portfolio.
Take a minute to digest that, if you shall, because there’s more. That solitary NCD happens to be ranked BBB (CE) and it is under “credit watch with negative implications”. Quite simply, that NCD is just about making the slice to be ‘investment grade’ and is precariously near to sliding below that. If it can, well, there’s no saying how much a trader could be impacted. If industry practices are anything to go by, to begin with, the fund house would need to mark down the value of this investment by at least 25%. And for those who have ignored, here’s a bit of a flashback.