This is a guest post by Dheeraj Singh. Dheeraj was a fund manager for many years specializing in fixed income. He used to head fixed income at IL&FS Mutual Fund (before it got taken over by UTI) and subsequently worked with Sundaram BNP Paribas Mutual Fund (now Sundaram Mutual Fund) heading the fixed income desk. He runs Finanzlab Advisors, a treasury and risk management consultancy. Four years ago, I’d written about how the “Promoter Put” – an implicit assumption that promoters of mutual funds would protect investors from large losses in case of adversity – had led to investor complacency and eschewing of prudent risk assessment. This in turn led to an anomalous situation that investments in funds were decided based on perceived brand value of the promoter entity rather than the actual performance of the fund or skills of the fund manager. The signalling effect of the “Promoter Put” was strong enough for large investors to invest based on the likelihood of the parent bailing out the fund house in case of adversity. The thinking was – they have a reputation to protect, so why worry – they’ll take a hit to protect us. Recent developments may have put …
[via Capital Mind]
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