The Reserve Bank of India has announced a special liquidity facility of Rs 50000 crore for mutual funds to overcome the crisis arising out of the closure of 6 debt fund schemes by Franklin Templeton India, the country’s leading mutual fund house. RBI announced a special loan scheme for mutual funds on Monday, under which they will be provided a loan of Rs 50,000 crore, so that the liquidity crisis in the industry does not arise.
Franklin Templeton closed the schemes citing pressure to withdraw the unit due to Corona virus epidemic and lack of liquidity in the bond market. Regarding its decision, the company says that due to Corona crisis, people have withdrawn their money rapidly due to which the company is facing cash crisis. Now as the pressure increases, the securities of all these funds will be sold. Money will be returned to investors in several stages. The company says that fear of money getting stuck in debt funds has increased. The total asset base of these 6 open ended debt schemes is about 28 thousand crores.
Investors would incur a lot loss due to this decision of Franklin Templeton. Huge amounts of money of investors are stuck due to the closure of these schemes. To ease off their loss, RBI has decided to take the special liquidity facility.
In a statement, the central bank said that COVID-19 has led to increased volatility in the capital markets. The spread of coronavirus has put liquidity pressure on mutual funds (MF). “With a view to ease liquidity pressure on MFs, it has been decided to provide special liquidity facility for Rs 50,000 crore of mutual funds” RBI said. The Reserve Bank of India (RBI) also emphasized that it will take all necessary steps to reduce the economic impact of COVID-19 and maintain financial stability.
While this crisis is currently in high-risk debt mutual funds, liquidity remains in the rest of the industry. Under the Special Liquidity Fund-MF, RBI will start a 90-day repo operation at a fixed repo rate. SLF-MF is on-top and open-ended and banks can submit their bids to avail finance on any day from Monday to Friday. The facility has started from April 27 and will be operational till May 11, 2020. According to market conditions, the central bank will consider increasing its time frame and funds.
RBI has taken such a step earlier also
Earlier in July 2013, the Reserve Bank provided almost similar cash assistance to mutual fund companies. The central bank had then given guidelines to provide special loan facility of Rs 25,000 crore to banks to meet the cash requirement of mutual fund
companies. In addition, during the Lehman Brothers crisis in October 2008, mutual fund companies were especially given additional cash support.
These 6 schemes closed
- Franklin India Templeton Low Duration Fund
- Franklin India Templeton Income Opportunity Fund
- Franklin India Templeton Short Bond Fund
- Franklin India Templeton Credit Risk Fund
- Franklin India Templeton Short Term Income Plan
- Franklin India Templeton Dynamic Acquired Fund
What does this mean for investors?
It is evident that the financial health of these funds was deteriorating, hence the closure was a decision taken in this direction. After 23 April 2020 neither new investments was allowed to be made in these funds nor those who have their units will be able to sell and redeem it. However, these schemes will release their Net Asset Value (NAV) daily as before. Investors of these funds will not be charged for fund management. Investors’ money is locked until the fund house pays it. Investors will get their money back but it may take some time now.
What will be the impact on other funds?
This will have no impact on funds that have good ratings and low-risk debt securities. However, it may have a bad impact on securities with low ratings and high debt risk. AMFI says that most of the fixed income mutual funds invest in good credit quality securities and have sufficient liquidity to continue functioning, so there is nothing to worry about.