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The story goes so far: In a bid to force a possible redemption of the mutual fund industry after implementing the Franklin Templeton Mutual Fund’s six-day loan scheme, the Reserve Bank of India (RBI) announced a special liquidity window on Monday. Rs 50 billion for mutual funds. Under the scheme, the RBI will carry out repo operations (repatriation agreements) for the past 90 days with a fixed repo rate of 4.40% for banks. Under the RBI, banks can obtain funds in this service exclusively to meet the liquidity requirements of mutual funds by borrowing and making purchases and / or nuisance of corporate-grade corporate securities, commercial papers (CPs), bonds and certificates of deposit (CD) that home financers expect. The plan will be open until May 11 or to use the amount provided above.
Also read | Why did Franklin close 6 funds?
Why is this required?
The trigger for the liquidity window was the decision of the Franklin Templeton Mutual Fund to have six debt funds with combined assets under management (AUM) worth Rs 26 billion. The fund house decided to implement the scheme to keep the value at a level: its value was affected by the redemption pressure and market losses due to the lack of liquidity due to the COVID-19 pandemic. This has led to fears that debt funds in many other fund houses may face redemptive pressures caused by the collapse of the sudden movement of Franklin Templeton.
Is the fund’s debt scheme under pressure?
Although the fund industry clarified that what happened at Franklin Templeton’s mutual fund was an isolated case, more liquidity and more problems persisted. Some fund houses have seen a significant erosion in the net asset value of some of Franklin Templeton’s post episode debt schemes due to a decrease in employee spending. Not surprisingly, to date, banks have loaned around £ 2bn rupees through the RBI liquidity window to finance the fund. Market watchers say the debt scheme is under pressure due to a combination of factors.
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How many debt assets do mutual funds manage?
The AUM fund industry loan scheme is estimated at £ 15 lakh crore, which is more than half of India’s total fund construction. The worst subcategory of debt funds is the credit risk fund, which represents only 5% of total debt assets. However, investors do not care about the overall credit quality of assets; therefore, the debt scheme generally sees an increase. The mutual fund can borrow up to 20% of its assets to satisfy the need to exchange or pay dividends. As of April 23, four mutual funds, a total of 42 fund houses, had total cumulative debt of Rs 4,427.68 million, according to the Mutual Fund Association of India (AMFI). The fund manager said that while the loan was due in March, still a significant loss in payroll taxes and other obligations in the quarter, the repayment of the loan through April was worrisome.
What is the quality of our mutual fund securities?
Fund managers say more than half of the assets in the debt scheme have AA ratings or higher. He said that while 20% to 30% of AUM’s total debt would be rated AAA or cash, another 30% to 50% would be rated AA + or AA. While overall debt quality, based on current ratings, looks good on paper, the country’s key lenders have been addressing the cash flow of most companies, and investors are expecting a significant segment deficit. big and small of the company.
Also read | Least risky monetary debt suggested to editor after IL & FS: Morgan Stanley
What do regulators do?
Managers are aware of potential risks and closely monitor them. Market participants have written to the Securities and Exchange Board of India (SEBI) to take action against the Franklin Templeton Mutual Fund, including the appointment of a high-performance committee to take over the administration of the fund’s house while review investment decisions. The National Association of Supporters of India (ANMI), a general body representing approximately 900 brokers, has written to the Ministry of Finance and SEBI that almost 64.73% of the total AUM of the Franklin Fund of India Fund is in securities rated A or below. While in my Franklin India Fixed Term Plan, these values represented almost 59% of total assets. The brokerage association says the Franklin Templeton mutual fund invests in long-term securities despite the SEBI rule that very short-term funds can only have a three and six month bond.
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