Lessons from the JP Morgan – Amtek Auto Debacle

Last Updated on

Recently, after two of its debt fund schemes suffered a sharp fall in NAV due to acredit rating downgrade of Amtek Auto debentures, JP Morgan AMC limits redemption from two of its schemes. Some lessons from the debacle.

1. Financial advice can go wrong!

Advisors and analysts are human and they can go wrong at any time. At the end of the day, there is a subjective element to fund, stock and bond selection and portfolio management. We as investors must recognise that and not blindly follow their advice. It is our money. No one cares about it as much as we do. Whether the advice is from our distributor, financial advisor or from a magazine, understanding the nature of the product and its suitability is our responsibility.

No one understands your risk appetite and risk profile as you do (risk profiling questionnaires can be woefully inadequate). So researching financial products (even those suggested by a professional) is your job.

If an advisor claims that he/she would never have recommend “such funds”, run away from them.


2. What happened at JP Morgan can happen at any AMC!

A good time to remember the advice, “diversify across AMCs”. It is hard for investors to differentiate between ‘good’ and ‘bad’ AMCs.  Perhaps no one is ‘good’!

3. Read Scheme information documents!

Very few investors are aware of the fact that reading scheme information documents is one of the best ways to understand how mutual funds work. Where they invest, and what the risks associated with the investment.

Most investors (like me) cannot analyse the contents of a mutual fund portfolio. If I could, I would be investing in stocks and bonds directly! So I make sure I understand the mandate of the funds that I hold.

4. Stick to liquid and ultra-short term debt funds!

These funds can be part of any debt portfolio for any amount of time. The advantage with these funds is that interest rate risk and credit rating risk  are minimised due to the short duration (4-91 days for liquid funds and max. 3-4 months for ultra short-term funds)

Personally, I think there is no need to be scared of corporate bond holdings. However, if you don’t like them, easy enough to find debt funds which do not invest in such bonds.

Also, as Mr Raghu Ramamurthy mentioned earlier, short-term gilt funds are a good option too. This eliminates credit risk ( risk of default) but has interest rate risk. So one can use it for slightly longer durations.

5. Why bother with debt funds?

Speaking of duration, if my financial goal is less than 3 years away, there is no need to use debt funds. I get no tax advantage. I can use RDs and FDs with peace of mind.

This is true for long-term goals also when they are only 3 years away from the target date. Just as it makes sense to decrease equity allocation as the target date draws near, it makes sense to get out of all debt funds (except perhaps liquid funds) too. Either we can shift them to safe FDs or switch them to liquid funds.

6. Read why I insist that Debt funds are not an alternative to fixed deposits Distributors sell them as alternatives because it is their job to sell. We cannot be naive enough to take that at face value. Getting financial advice from product sellers is silly.

7. Panic does not help! If a mutual fund is hit by a credit rating downgrade (like the JP Morgan funds), the NAV will fall sharply. If we panic and try to redeem as soon as the AMC lets us to(!), the notional loss could well become a permanent one. Holding on to the fund until the loss is erased (close to when the bond matures) is the best solution given the circumstances.

8. It is not your money!

It is your money before you invest. After you invest, what you get upon redemption is NAV times units held. This is not as the same as “getting your money back”. Once we get into a mutual fund, the collective interest of the unit holder takes precedence.

What are your takeaways from this incident?

Do share if you found this useful

About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media

Content Policy

Freefincal has original unbiased, conflict-of-interest-free,  topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policy Our website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.

Do check out my books

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingMy first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.  It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantGamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

Leave a Reply

Your email address will not be published. Required fields are marked *