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Indian mutual funds have firewalls

Market experts say there is no correlation between the turmoil in global funds to Indian mutual funds, reports MC Vaijayanthi.

business Updated: Aug 16, 2007 22:54 IST
MC Vaijayanthi

The credit default in the US housing market hit global funds that had invested in sub-prime--below investment grade—mortgage-backed securities. As the Sensex raced past the 15,000 mark in July, investors continued to pour money into mutual funds in India, taking the assets they manage to an all-time high of Rs 4,86,651 crore.

There is no correlation between the turmoil in global funds to Indian mutual funds, assure experts. But it is prudent to watch the net asset values of schemes and track the portfolios, they advise.

"I do not envisage a scenario like what has happened abroad. We do not have complicated fund structures like those of the Bear Stearns funds that makes calculation of net asset value difficult," explains Krishnan Sitaraman, head of fund services, CRISIL.

In India, mutual funds have to declare daily net asset values and their portfolio of securities every month. Any material change made in the scheme has to be approved by the regulator. “Indian funds are not leveraged and to that extent risk is limited,” says Gul Tekchandani, an investment analyst.

The mutual fund application forms carry the basis of net asset value calculation for redemption and payouts. In a worst case scenario a fund may tell investors that it will delay the payout by a few days and not announce a freeze in redemption as it would be a blow to its credibility, say fund analysts.

Two-thirds of all the assets Indian mutual funds manage are in open-ended schemes, which means investors have the option to withdraw money at any time based on the prevailing net asset value. In case of redemption pressure, the only possible option would be for the sponsor or the parent of the asset management company to borrow to fulfill the payout.

"I do not think people are waiting to rush in for redemptions," says C Jayaram, executive director, Kotak Mahindra Bank.