Page 30 - mutual-fund-insight - Mar 2021_Neat

COVER STORY

profile of Franklin’s closed funds),
9PZR WYVMPSL VM -YHURSPU»Z JSVZLK M\UKZ all funds are marked on a higher

The new risk-o-meter would have done a better job at identifying the risk risk scale. So, this new risk-o-
meter could have served as an
inherent in Franklin’s six shuttered debt funds.
early warning signal for investors
Category New risk-o-meter Old risk-o-meter had it been in force back then.

Credit Risk Very High Moderate Up-to-date: AMCs have to calculate
the risk grades on a monthly basis,
Dynamic Bond High Moderate which ensures that they don’t

Low Duration Moderately High Moderate become dated and irrelevant in
case the underlying realities
Medium Duration Very High Moderate change rapidly.

Short Duration Very High Moderate Prompt notifications: AMCs are
mandated to inform investors by
Ultra Short Duration Moderately High Moderate email and SMS whenever the risk

grade changes. Not only that, every
;OL UL^ YPZR V TL[LY MVY LX\P[` M\UKZ OHZ year, at the end of March, they also
have to disclose the number of
KPZHWWVPU[LK =PY[\HSS` HSS M\UKZ PU L]LY` LX\P[` JH[LNVY` times the risk level has changed
OH]L NV[ [OL º=LY` /PNO» YPZR [HNNPUN over the year. That should ensure
that investors come to know of
fund level is a simple average of the three risk parameters for debt these changes and they don’t get
different parameters. For schemes funds explained above, SEBI has buried under volumes of other
that invest in more than one asset given special power to the disclosures.
class, the risk scores of the liquidity score. As you know, the Therefore, the new methodology
respective asset classes are risk value for a debt portfolio is a makes the risk-o-meter an
calculated and added up. simple average of the credit-risk objective, easy-to-understand and,
value, interest-rate risk value and most importantly, a relevant
>/@ 0: 0; ( )0. :;,7 liquidity-risk value. However, if measure to evaluate and compare
-69>(9+& the liquidity-risk value is higher funds in terms of risk.

This revised risk-o-meter has a lot than the average of all three, then
going for it. the value of liquidity risk will be /6> <:,-<3 0: 0;&
Rooted in reality: As mentioned considered as the risk value of the Well, the answer to that question
earlier, it brings the risk grading debt portfolio. depends upon the ability of the
closer to reality by basing it on We think this is of great risk-o-meter to call out the funds
what the fund actually holds. significance because a lot of issues which assume greater risk than
Captures all dimensions of risk: We arise because of the inherent their peers. So, let’s look at some
believe that the chosen parameters mismatch between the liquidity actual numbers for equity and debt
reflect all the relevant ones that offered by debt funds versus the funds to find some answers.
contribute to the riskiness of liquidity that markets in corporate Equity funds
various asset classes. One can bonds, particularly the lower-rated To put it shortly, the new risk-o-
argue that this methodology misses ones, have to offer. Even in the meter for equity funds has
out on the concentration risk, i.e., much-publicised episode of disappointed. It fails to make any
the risk of investing too much in Franklin schemes, the fund house distinction between funds ranging
the securities of a single issuer. maintains that it’s the lack of from aggressive hybrids to passive
SEBI may want to consider it in a liquidity of the underlying large-cap index funds to small-cap
future upgrade but it doesn’t take portfolio, in the face of mounting funds or even sector funds.
anything away from the redemption requests, which led to Virtually all funds in every equity
comprehensiveness of the current their winding-up. If we look at category have got the ‘Very High’
framework. their risk grades as per the revised risk tagging (see the chart ‘Equity
The ‘liquidity’ master stroke: Among methodology (see the table ‘Risk funds as placed on the risk-o-

28 Mutual Fund Insight March 2021
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