[carboy]

Originally Posted by anandhsub

However at one point when the nifty was 6% down the ETF was only 4% down and hence I backed off. Finally at close nifty was down 7% which this was down around 2%. What causes this kind of mispricing in a fund that's so liquid?

I think 1 or 2% diff should be OK. I think it happens because there is probably lesser selling pressure on the ETF than on Nifty on the whole.

[carboy]

Originally Posted by SmartCat

I like the 50% gilt and 50% equity portfolio. Going by history, you will get equity-like returns with low volatility. That's because whenever there is a major dip in equities, gilt funds will shoot up in value.

What do liquid funds & ultraliquid funds invest in? Also some funds invest only in overnight papers - what is the name of those funds - are they the ones which are most protected from NAV dips (because of both interest rate changes & also defaults)?

Originally Posted by carboy

I think 1 or 2% diff should be OK. I think it happens because there is probably lesser selling pressure on the ETF than on Nifty on the whole.

The reason for some ETFs like SBI Nifty ETF being far off mark yesterday is here - https://www.livemint.com/market/stoc...382453748.html



Market makers for the ETFs didn't do their jobs to prevent the arbitrage.

[anandhsub]

Originally Posted by carboy

The reason for some ETFs like SBI Nifty ETF being far off mark yesterday is here - https://www.livemint.com/market/stoc...382453748.html

Market makers for the ETFs didn't do their jobs to prevent the arbitrage.

Thanks for that. Looks like I picked a bad day to start looking at ETFs

[SmartCat]

Originally Posted by carboy

What do liquid funds & ultraliquid funds invest in?

Liquid/money market funds invest in a mix of short govt treasury bills (safe, but low returns) and commercial paper (less safe, but higher returns). These are like 3 month bank FDs. If NBFC or banks borrow from liquid mutual funds, they have to pay back within 3 months.

But poorly managed liquid funds have seen large falls in NAV occasionally. This happens because of -

- Bad credit agencies slapping A+ or AAA ratings on NBFCs like IL&FS
- Poorly managed funds or fund managers investing large percentage of investors' money in a single NBFC with questionable reputation.
- NBFCs with poor reputation (like Reliance Capital, IL&FS, DHFL etc) doing a 'ponzi scheme' on liquid funds.

Eg: Let me explain the 'ponzi scheme' bit -

- Borrow Rs. 300 cr (for 3 months) from one fund house
- Borrow Rs. 600 cr (for 3 months) from another fund house after 3 months.
- Pay back Rs. 300 cr with interest to the 1st fund house
- Borrow Rs. 900 cr, Rs. 1200 cr etc and so on, till the whole pack of cards collapse.

But investors in liquid funds can protect themselves by carefully choosing their fund. Your liquid/money market fund should have a reputed name, long history and large AUM.

Also some funds invest only in overnight papers - what is the name of those funds - are they the ones which are most protected from NAV dips (because of both interest rate changes & also defaults)?

Yes, overnight funds
https://www.valueresearchonline.com/...uspended-plans

They offer around 0.5% pa less returns than liquid funds but is super-safe. The holding period of securities is just one night. The participants in overnight funds are mostly banks (and perhaps large NBFCs like HDFC or Bajaj Finance).

[DigitalOne]

Over the last few days FreeFinCal site has been putting up some really fine data-driven articles on Index vs Active, ETFs, Debt funds/defaults etc.

Highly recommended reading for MF investors.

[adithya.kp]

I was doing a bit of research on gilt and dynamic bond funds. I am surprised by the AUM size in these categories. The largest in gilt has 2071 crore and the largest in dynamic bond 3717 cr. I understand that 1. Debt market in India is not mature 2. A lot of people avoid these because of interest rate risk and credit risk (in case of dynamic bond). But still it looks very small. In fact, apart from retail, companies also invest their retained earnings here. ( Although liquid fund is the most common one). Considering this, it looks very small. What could be the reason for such a low AUM?

Also, I was researching on default of bonds. IDFC seems to be the unsung hero among all the fund houses. They haven't been hit in any of the defaults. ( I might have missed something though. Not sure). Dont recollect any default in SBI MF too.

[SmartCat]

Originally Posted by adithya.kp

I was doing a bit of research on gilt and dynamic bond funds. I am surprised by the AUM size in these categories. The largest in gilt has 2071 crore and the largest in dynamic bond 3717 cr. I understand that 1. Debt market in India is not mature 2. A lot of people avoid these because of interest rate risk and credit risk (in case of dynamic bond). But still it looks very small. In fact, apart from retail, companies also invest their retained earnings here. ( Although liquid fund is the most common one). Considering this, it looks very small. What could be the reason for such a low AUM?.

Retail will not invest in gilt funds primarily because of its complexity and counter-intuitiveness. If interest rates go up, it is good for FD investors. But it is bad for bond investors. If interest rates go down, it is bad for FD investors. But it is good for bond investors.

Companies don't invest in gilt funds because of interest rate sensitivity. Treasury operations of a company is supposed to generate predictable interest income - that's why liquid funds is the preferred route.

Almost all the govt securities trading in India is done by banks. 25% to 30% of a bank's income is from treasury operations (which is basically trading of govt securities). That's why whenever RBI reduces interest rates, bank stocks shoot up in value. That's because it straight away adds Rs. 100 cr or Rs. 500 cr to profits, because of rise in value of govt bonds that they hold.

[huntrz]

Originally Posted by adithya.kp

I was doing a bit of research on gilt and dynamic bond funds. I am surprised by the AUM size in these categories. The largest in gilt has 2071 crore and the largest in dynamic bond 3717 cr.

Same here, after current market rout and being disillusioned with equity I was also researching debt funds with decent returns. I was of the opinion credit risk funds should give highest returns but I was surprised to see Gilt funds topping the list. It is interesting to see the the fund category with almost 0 default risk also being the top performing in terms of returns. But if I am not wrong until ILFS crisis, the credit risk and corporate bond fund used to top the debt category.

[bluevolt]

I was just watching Zee Business and they are initiating 'Close Market' campaign on twitter. Most advisors there are suggesting to exit the market at whatever levels anyone is currently holding.

Is it a right advice? Many investor's must be already witnessing negative returns now in their MFs portfolio? Taking an exit will assure that you have booked your losses with zero hope of recovery ever.

[poloman]

Originally Posted by bluevolt

I was just watching Zee Business and they are initiating 'Close Market' campaign on twitter. Most advisors there are suggesting to exit the market at whatever levels anyone is currently holding.

I think closing down markets for a week should be a good move in the current circumstances. There is no clarity on anything and fear is the only driving factor. But not sure about exiting the market at current levels. That would be a knee jerk move.

[pradkumar]

Let me compare some funds:

IDFC Government Securities Fund
Modified Duration: 8.19
Avg. Maturity: 13.06
Yield to Maturity: 7.13

Nippon India Gilt Securities Fund
Modified Duration: 5.78
Avg. Maturity: 7.96
Yield to Maturity: 6.51

Category (normal gilt)
Modified Duration: 6.22
Avg. Maturity: 8.52
Yield to Maturity: 6.43

IDFC Government Securities Fund - Constant Maturity Plan - Direct Plan
Modified Duration: 7.30
Avg. Maturity: 11.17
Yield to Maturity: 7.06

* Category values are not available for gilt constant maturity plan

Therefore, from an interest rate sensitivity perspective, Nippon India Gilt Securities Fund is better since it has the lowest modified duration.

Why does IDFC Government Securities Fund have such a high modified duration? It is higher than even IDFC Government Securities Fund - Constant Maturity Plan. Considering that it is a normal gilt fund, it is strange. Moreover, the latter has two securities (of the total 5 securities) that mature in 2030 and 2033 compared to the former that has two securities that mature in 2027 and 2028.

Is it because the average maturity of IDFC Government Securities Fund is higher at 13.06 compared to 11.17 of the latter? Can you please explain this?
Thanks,

Pradeep

Originally Posted by SmartCat

Normal Gilt funds and Constant Maturity Gilt funds both hold govt securities - not more percent or less percent. But normal gilt funds hold short term gsecs too. If the fund manager of normal gilt fund believes that interest rates are going to rise8.19, he can protect the fund's NAV by moving funds from long duration gsecs to short duration gsecs. That option is not available for the fund manager of constant maturity gsec fund.

[carboy]

Originally Posted by poloman

I think closing down markets for a week should be a good move in the current circumstances

What about when markets are rising too much - should they be closed for a week when that's happening?

[poloman]

Originally Posted by carboy

What about when markets are rising too much - should they be closed for a week when that's happening?

Ideally yes, but other than pull backs how many times have we seen markets rising in the range of 5-10% every session. Fear causes much mayhem than hope.

[carboy]

Originally Posted by poloman

Ideally yes, but other than pull backs how many times have we seen markets rising in the range of 5-10% every session. Fear causes much mayhem than hope.

Markets mostly crash faster than they go up. That's because going up requires someone to put up money to buy at a higher price While people not buying will cause markets to go down. Gravity works while markets going down & hence markets going down is mostly faster than markets going down.


If you think fear is causing markets go to down irrationally - i.e. things are undervalued now, then you should be buying now rather than asking for markets to be closed down.

Markets go down. If that is not acceptable to someone they should be in SBI Fixed Deposits.

[poloman]

Originally Posted by carboy

If you think fear is causing markets go to down irrationally - i.e. things are undervalued now, then you should be buying now rather than asking for markets to be closed down.

Markets go down. If that is not acceptable to someone they should be in SBI Fixed Deposits.

You may be right. But all what it is doing is to create a vicious cycle. Most people are not well versed with market mechanisms. I myself have voiced my criticism in this thread against average Joes entering the market and mutual fund schemes lured by ads and expert advice. Most such people will look for redemptions now putting even more pressure on the fund houses. So some of the damages will be irreversible.