In the race to mobilise bulk money, mutual funds are not only manipulating net asset values but also allowing big-ticket investors to get in at lower NAVs and exit at higher values without any exit loads.
A few fund houses are deliberately backdating transactions so that the preferred high-value investor gets the benefit of a lower NAV and then is allowed to exit at a higher NAV a few days later without any exit loads.
For instance, if a big-ticket investor issues a cheque for a transaction on a Friday, the investor gets the benefit of the NAV on Thursday. The investor has the facility of exiting on the following Monday when the scheme has a higher value.
Such transactions take place in income schemes, money market schemes and gilt schemes where the NAVs show a secular growth.
J M Mutual Fund does allow high-value cheque issuers to get the benefit of the previous day's NAV.
Krishnamurthy Vijayan, the chief executive officer of the fund house, pointed out that it was not backdating of cheques but just an accommodation which has been provided to their high-value customers, provided that the cheque proceeds are utilised on the same day.
Incidentally, this information is found in the fund's prospectus as well.
Funds are also manipulating the NAVs of their debt scheme through a free interpretation of the Credit Rating Information Services of India Ltd's debt market valuation.
Crisil does not specify a pricing for each instrument but broadly states that an instrument of a certain tenor and maturity, and coupon rate should have a certain yield.
For argument's sake, let's take a one-year triple A rated paper which has a yield of 6.1 per cent. The fund buys an instrument matching the specification but which is illiquid (not traded in the recent past).
Such a paper would be available at a yield of 7 per cent. However, when the actual matrix is declared at 6 per cent on the following day, the fund makes a gain owing to this discrepancy reflecting in its NAVs.
Some funds utilise this to prop up the NAV at a particular level to accommodate the exit of a large investor. This naturally means that the smaller (retail) investor who has no clue about what is going on takes a hit on his investment.
This means that the fund has to invest a lot of thought and time to identify the right kind of securities which would give the required NAV. It means that the funds would necessarily be investing in some illiquid securities.
Ramgopal K, the chief investment officer (fixed income) at IL&FS Mutual Fund pointed out that the definition of illiquidity was also subject to interpretation and even gills are not so frequently traded.
This provides funds the leeway to invest in an instrument of their choice. Those stuck with illiquid scrips usually hold them to maturity, as it becomes difficult to get rid of them.
According to industry sources, the only way to minimise this would be to adopt total transparency in disclosures or mandate a third party to undertake valuations.
Some funds such as J M Mutual Fund have mandated a subsidiary of Crisil to undertake the valuation for their debt instruments in order to avoid any confusion.
Portfolio disclosures at present do not include details of the coupon on the instruments held or the maturity periods.
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