Debt Funds Are Risky, Shouldn’t Be Compared With Fixed Deposits, Says S Naren

Investors have a misconception that debt funds don't carry risk and the instruments are as secure as fixed deposits, said the head of India's second-largest asset manager.

“Debt mutual funds also carry risk and you will certainly get additional return for the risk,” said S Naren, executive director and chief investment officer at ICICI Prudential Asset Management Company. He was responding to a question on the risk asset managers face due to their exposure to the debt-laced Essel Group.

“If I want a 7 percent return, I'll invest in government securities,” Naren said at the Chennai edition of BQ Edge, BloombergQuint's on-ground initiative. “If I want a return of 10 percent, I should be willing to take certain risk.”

Mutual funds and non-bank lenders holding shares of Zee Entertainment Enterprises Ltd. pledged by Essel Group in February not only allowed a standstill till Sept. 30 if share price falls but also on upcoming obligations on these borrowings through non-convertible debentures. Mutual funds have a cumulative exposure of Rs 7,570 crore to the Essel Group as on February, with the largest being Aditya Birla Sun Life Mutual Fund, followed by HDFC Mutual Fund and Franklin Templeton Mutual Fund.

Still, Naren said mutual funds are among the most transparent asset classes. “[Due to] the benefit of transparency SEBI has done on us sensibly, all of you know what we own and what mistakes we have committed.”

He said that many non-bank lenders have also lent to such companies. “But their names aren't available because you don't know their books.”