The Crisis in Debt


Naturally, equity investors think that a crisis in debt funds will not affect them. They tend to see equity and debt as if they were two asset classes that exist in distinct silos. But, the reality is very different. Every equity market crash always had a distinct debt market connect. The crash in non-banking financial stocks on Friday and the news of a mutual fund closing its debt schemes worth 25,000 crores indicate that something is brewing in debt. This requires speedy redressal.

Until yesterday, this appeared to be an issue of liquidity and the RBI dealt with it as one. But, overnight it has turned into a credibility issue for debt mutual funds. A run has already been on against several mutual fund houses and their debt schemes. While there was a crisis in one of the fund houses, this must not become a contagion. Confidence building, speedy resolution and transparency are essential to restore investor confidence.

This will be crucial in the coming week. The investment style of a few debt fund managers must not lower the credibility of the entire industry. It is the duty of both banking and mutual fund regulators to come together to address this crisis. For starters, speaking in one voice may dispel fears and rumours. Speedy resolution and clarity on the way forward are critical to the safety of equity markets, mutual funds, and the banking industry. What is misplaced risk-taking by one fund manager, must not be allowed to become a contagion.

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