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Investors in Franklin Templeton's fixed income funds were a happy lot till April this year. The schemes they invested in like the Franklin India Low Duration Fund, Credit Fund, and Ultra Short Bond Fund—all with risk labels of “moderate” and “moderately low”—were giving them better returns than any others of the same type.
On April 23, however, Franklin Templeton Mutual Fund wound up six fixed income schemes citing “severe market dislocation and illiquidity” caused by the Covid-19 pandemic.
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A study of the portfolios held by these funds indicated that while the shock of the Covid-19 pandemic pushed Franklin Templeton's six funds over the edge, the trouble was brewing much before then. It turned out that the mutual fund was taking on far more risk, especially liquidity risk, than investors would have been comfortable with. If only they knew.
Spurred by these events, the Securities and Exchange Board of India has stepped in and asked mutual funds to label their products more accurately. Specifically, it has devised a new “risk-o-meter” that will inform investors on an ongoing basis of the risk contained in the mutual fund schemes they're planning to buy, or are invested in.
On this BQ Big Decisions podcast, BloombergQuint spoke with Harshvardhan Roongta, certified financial planner and co-founder Roongta Securities, about the calculations that will go into the readings on the new risk-o-meter, and how investors can plan their investments based on the implicit risk in each mutual fund scheme.
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