Leveraged positions

Suresh Krishnamurthy

THE recently launched funds of HDFC -- HDFC Growth Fund and HDFC Balanced Fund -- have run up a noticeably large negative current assets figure.

In HDFC Growth Fund, net current assets are at negative 15.5 per cent of the net assets while, in HDFC Balanced Funds, it is at negative 9.3 per cent. Net current assets turn negative normally only when there are borrowings by a mutual fund.

Indian Mutual Fund regulations, however, frown upon leveraged positions -- that is, positions financed by borrowings. SEBI regulations state that a mutual fund cannot borrow except for meeting temporary liquidity needs for redemption or payment of interest or dividend. Even in such cases, borrowings cannot exceed 20 per cent and have to be repaid in three months. As they are also not allowed to lend, nothing other than redemptions and payment of interest or dividend can create temporary liquidity needs for a fund.

In HDFC Growth Fund, there do appear to have been some amount of redemptions. The fund collected close to Rs 150 crore in the initial public offer, and the net assets have since fallen 12 per cent. However, the NAV is down by only about 3 per cent, indicating redemptions. Therefore, there is ground to believe that borrowings may have been made to finance redemptions. In the Balanced Fund however, the increase in net assets indicates that there were actually fresh inflows. In this backdrop, the higher negative net current assets figure is a little confounding.

Strictly, however, the higher negative net current asset figure does not indicate leveraged positions. Both the Growth Fund and the Balanced Fund have invested heavily in the call market and, therefore, the proportion of cash and cash equivalents is still high. In fact, the higher figure could even be due to accounting of investments in the call money market and may not represent borrowings at all. Though this is by no means alarming, the large negative net current asset figure is still surprising.