6 May 2020

Analysing the health of mutual funds

What should a mutual fund investor ideally do? Study mutual fund documents first and then invest. What did I do? Bought some funds without much analysis or reasoning and then, after a few months, I am looking at fund fact sheets and trying to understand how well they are managed. I am saying this upfront because I want to highlight that I am just doing things haphazardly, including the analysis itself. I don’t know what all information one should look at in a fact sheet, and how to determine if a fund is doing well. With that caveat out of the way, let me get into what I found from my analysis.

As a newbie investor, Franklin India’s decision to shut down 6 debt funds was bizarre to me. That news made me realise how some mutual funds can be bad. I had noticed this Reddit thread before, but couldn’t understand what they were talking about. I didn’t try to understand the discussion because I hadn’t invested in any of those funds. After the news, I reread that post and read some more on the web. I started to get some idea on what fund attributes I could look at.

If monitoring the health of mutual funds is an important thing investors should do, there must be dashboards on the Internet… or so I thought. After failing to find such a dashboard, I decided I had to make one myself. I downloaded March 2020 fact sheets of all my funds and I summarised some key stats (click on the image to magnify):
Spreadsheet showing AUM, NCA, and % of risky debt assets of some mutual funds

This was more confusing than useful to me: of the 12 funds I had data for, 6 had negative cash! Many debt funds, including liquid funds, had exposure to sub-top-grade debts. Is every debt fund taking risk in the market then?

After a few hours, I decided to add data from February so I can see how things have changed over the course of March. This turned out to be a good idea. Now I was able to see a clearer picture:
Spreadsheet showing some mutual funds' NAV, AUM, NCA, % of risky debt assets, and change in the number of units held

The market was less crazy in February, and that shows up in the numbers:
  • Only 2 funds had negative cash. They also held a fairly low amount at -0.29% and -1.46% of respective AUM.
  • Other than Kotak Savings, exposure to sub-top-grade debt was also minimal. Nippon Liquid fund had 0.35% lent to unrated borrowers.
In March, uncertainty rose sharply due to Covid-19 lockdown. That is also reflected in the numbers:
  • Many investors have redeemed their debt funds: 30% reduction in AUM seems normal! (Remember, this was before the Franklin fiasco.)
  • Quite a few funds now hold negative cash, probably to accommodate the high number of redemption requests.
  • Risky debt has also increased across the board.
  • PGIM is the only fund house to exclusively hold top-tier debts; they are also the only debt fund managers to hold some cash in hand.
(One surprising observation from the data is that people have bought equity mutual funds while they have exited debt funds. Maybe they were rebalancing because it was the end of quarter?)
What are my takeaways from this exercise? I was fond of Kotak Savings fund because it looked so nice. Kotak web sites are so good, I just loved looking at this fund’s official web page. PGIM UST fund’s site looks okay, but it’s hardly impressive. Logging into PGIM’s investor web site also doesn’t work most of the time. Due to all this, I didn’t really like PGIM funds. Dumb mistake, I know! I was judging both Kotak and PGIM ‘books’ by their ‘covers’. When I look at my spreadsheet, however, I see how disciplined PGIM’s fund managers are, and how risky Kotak Savings fund really is.

If I hadn’t gone through this exercise, I might have sold the PGIM units and bought Kotak units instead. I am so glad I sat down and looked at the numbers.

No comments:

Post a comment