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Mutual funds in troubled waters: Decoding Franklin Templeton fiasco

To calm investors' nerves and ease liquidity pressures on mutual funds (MFs), the RBI has announced a special liquidity facility for MFs of Rs 50,000 crores via the banking industry, four days after that unpleasant incident took place

twitter-logoNiti Kiran Last Updated: April 28, 2020 | 12:55 IST
Mutual funds in troubled waters: Decoding Franklin Templeton fiasco

Franklin Templeton decision to voluntarily wind down its six credit fund schemes in the wake of redemption pressure and tight liquidity in the high-yield bond market with a total asset under management of Rs 30,852 crores (as on March 31, 2020) has created significant ripples in the capital market and has further reduced investor risk appetite.

Data sourced from Value Research revealed that of the six schemes namely - Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Short Term Income Plan, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund and Franklin India Income Opportunities Fund, only Franklin India Credit Risk Fund and its Ultra Short Bond Fund have outperformed their category average returns over three years (as on 24th April 2020). Over one-year period as on 24th April, returns of just its Credit Risk Fund managed to limit its fall at 4.3 per cent compared to the category average returns of -4.6 per cent.  

To calm investors' nerves and ease liquidity pressures on mutual funds (MFs), the RBI has announced a special liquidity facility for MFs of Rs 50,000 crores via the banking industry, four days after that unpleasant incident took place. "The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid," the apex bank clarified.

The funds availed under the scheme will be used by banks exclusively for meeting the liquidity requirements of mutual funds by extending loans and undertaking purchase of repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of deposit (CDs) held by MFs, the RBI said.

The current problem to a great extent, however, is due to higher credit risk exposure in many MF portfolios, which is also highly illiquid presently. "While the current step by RBI provides liquidity to a large section of debt MFs, the "Credit Risk" issues of these MFs are still not completely addressed. In the current environment, banks are likely to have limited appetite for lower rated papers as they are showing a significant credit risk aversion. Even with this liquidity facility announced by RBI, some lower rated credit exposures of MFs may not find many buyers," said a CARE Ratings report.

Though a closer look at the debt MFs portfolios provides some respite as a majority of their investments were in higher-rated papers.

The rating wise allocation as on March 31, 2020, shows that more than 80 per cent funds in medium duration, low duration and short duration fund category invest over 20 per cent of their assets in AAA ratings papers. Around 66 per cent funds in the ultra short duration category invest over 20 per cent of their assets in AA and equivalents ratings papers.

The credit risk funds, which invest mainly in corporate bonds and are the riskiest of the lot, has seen only 45 per cent funds investing over 20 per cent of their assets in AAA ratings papers and around 70 per cent invest over 20 per cent of their assets in AA and equivalents ratings papers.

Going by the same yardstick, in the most versatile debt fund- the Dynamic Bond funds -- close to 42 per cent funds invest in highest rated debt papers and just 19.4 per cent invest in AA and equivalents.

Also read: BT Buzz: Debt fund closure by Franklin Templeton; should you be worried?

Also read: Franklin Templeton Debt Fund crisis: When and how much money will investors get back

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