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Mutual funds make limited borrowing from RBI's credit lines

Mutual funds make limited borrowing from RBI’s credit lines

 

Schemes closed by Franklin Templeton Mutual Funds:

Franklin Templeton Mutual Fund’s has decided to wind up their 6 debt schemes from 23rd April, 2020. The 6 schemes closed by Franklin Templeton Mutual Fund’s was worth ₹26,000 crore. The closure of these 6 schemes significantly reduced liquidity in the Indian bond market. Money of many retail investors and High Net worth Individuals (HNI’s) is blocked as there will be no option of liquidity available in their portfolios. Executives from Franklin Templeton Mutual Funds noted lock down outbreak of COVID-19 and the lock down imposed in state compelled them to take this decision. To control the uncertainty in the financial market, RBI launched new provisions to tackle this problem.

 

Reserve Bank of India launched special liquidity facility:

In late April 2020, Reserve Bank of India launched a special liquidity facility for mutual funds (SLF-MF). This special facility states a provision of total corpus of ₹50,000 crore is available and Mutual funds can borrow money through banks. The functioning will be, corpus of ₹50,000 crore is available and banks are allowed to borrow money from Reserve Bank of India for maximum 90 days. They can lend money to mutual fund firms by keeping collateral of their portfolio. Once the time span of 90 days elapses, the lender needs to pack back the money and take their collaterals. Further, banks will return money to the Central bank. Reserve Bank of India noted this facility can be availed by a bank only for lending back to Mutual funds.

 

Limited borrowing from RBI’s special liquidity facility:

The special liquidity facility provided by Reserve Bank of India (RBI) to mutual funds did not observe massive utilization. The utilization was only ₹2,430 crore from the total ₹50,000 crore window. Media reports noted, rather than lending money from bank, mutual fund’s preferred selling securities to bank and to their other parties. As mutual funds preferred to sell securities to the banks and other counter parties, this shown a spike in sales of debt papers of some NBFC’s.

 

Redemption of debt funds:

Media reports noted the special liquidity facility provided by Reserve Bank of India (RBI) to mutual funds has controlled the redemption of debt funds. In March 2020, various debt funds shown massive outflow. Due to this pandemic, a huge amount of redemption in debt funds is observed. In March 2020, there was a massive outflow in open-ended Debt funds of ₹1,94,915 crore. However, in the month of April 2020 the outflow continued, but inflow of ₹43,432 crore was executed.

In April 2020, it was observed that redemption in credit risk funds was ₹19,238.98 crore. Low duration fund also observed redemption of total ₹9,841.07 crore in the month of April. Further redemptions in various schemes like Ultra Short Duration fund, Money market fund, Short Duration fund amounted to ₹3,419.32 crore, ₹1,210.35 crore, ₹2,309.05 crore respectively.

 

Ease in NBFC’s sector:

The national movement of Atma Nirbhar Bharat Abhiyan / Self-Reliant India initiated by Prime Minister Narendra Modi is to support India’s all small and local businesses. Finance minister Nirmala Sitharaman announced economic booster package of ₹20 crore under government’s Atma Nirbhar Bharat Abhiyan / Self-Reliant India to fight against COVID-19. The economic booster package of ₹20 crore includes new provision to aid NBFC sector. Non-banking financial companies (NBFCs), Microfinance institutions (MFIs) and Housing finance companies (HFCs) will get liquidity support of ₹30,000 crore under liquidity scheme. Under this scheme, banks can invest in investment-grade debt papers issued by NBFCs through both primary and secondary market transactions. The investment up to ₹30,000 crore will be entirely guaranteed by the Government of India.

Additionally, NBFCs, MFIs, and HFCs will even get the assistance of ₹45,000 crore under partial guarantee scheme. This assistance provided by government is to provide liquidity support to the institutions whose credit rating is low. This will be applicable for all the unrated papers and the papers with ratings of AA and below issued by NBFCs, MFIs, and HFCs. This will enhance the liquidity support of all the institutions under NBFCs, MFIs, and HFCs. Under this scheme, the first 20% loss will be borne by the Indian government i.e. public sector banks resulting in a liquidity of ₹45,000 crore.

 

 

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Debt, hybrid mutual funds see large outflows in April

Debt, hybrid mutual funds see large outflows in April

The financial market is undergoing a major liquidity crisis in Non-Banking Financial Company (NBFC) sector. This net outflow in debt fund is due to intense credit issue floating in the market.

 

Reason for Huge outflow in Debt Mutual Funds:

On 23rd April 2020, Franklin Templeton Mutual Fund discontinued 6 of its Debt mutual funds. They stated the reason for discontinuing six of its debt mutual funds to be the illiquid situation floating in debt market due to the unusual wake of COVID-19. They mentioned this step took by the company is for the safeguarding the interest of customers and to protect their money invested with us.

Franklin Templeton Mutual Fund abruptly discontinued the trade of Systematic transfer plan (STP) and Systematic withdrawal plan (SWP) and some of their debt schemes. This created panic among all the potential investors of this category. The decision took by Franklin Templeton Mutual Fund is adversely affecting the entire debt mutual fund category.

 

Outflow observed in different schemes:

The highest outflow observed is in the Credit risk fund amounting to ₹19,238.98 crore in April 2020. The second highest outflow is observed in Low duration fund of total ₹9,841.07 crore for the same time period. Further various schemes observed outflows viz. Ultra Short Duration fund, Money market fund, Short Duration fund of total ₹3,419.32 crore, ₹1,210.35 crore, ₹2,309.05 crore respectively. There are few more firms which observed unforeseen outflows.

 

Schemes which stood strong despite of crisis:

Liquid fund did not observe any outflow. On the contrary, it observed inflow of ₹68,848.01 crore in April 2020. Further various schemes which observed inflows viz. Long Duration fund, Banking and PSU fund, and Gilt fund of total ₹301.94 crore, ₹6,561.20 crore, and ₹2,515.61 crore respectively.

 

Scenario of Hybrid Funds:

Hybrid funds refers to funds which invest in both equity & debt. These funds are also critically damaged. Arbitrage fund in the category of hybrid funds is the only fund which observed Inflow of total ₹6,587.05 crore in April 2020. Funds viz. Equity saving, Multi Asset allocation, Dynamic Asset allocation/Balanced Advantage, Balanced Hybrid Fund/Aggressive Hybrid Fund, and Conservative Hybrid Fund in the category of hybrid fund observed a huge outflow in April 2020.

 

Views on this unexpected scenario:

The decision taken by Franklin Templeton Mutual Fund devastated the entire financial market. In this time of crisis, an ordinary investor will genuinely think to safeguard his\her money and no other option is left with them besides grabbing their money back into the pocket.

 

 

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Mutual fund industry in crisis due to pandemic

Mutual fund industry in crisis due to pandemic

The COVID-19 pandemic has hit nearly all sectors of businesses, people, economy, trade and the financial system worldwide. Mutual fund industry  has been adversely affected due to corona virus. All mutual fund investors have incurred huge losses in NAVs, specially those investing into categories of equity related mutual fund schemes.

Nearly 20 categories of mutual funds viz. energy funds, International funds, banking funds, large cap funds, mid cap funds, dividend yield funds, PSU funds, infrastructure funds, etc. are some of the mutual fund schemes that have faced losses tremendously in the last month. The energy sector saw a downfall of 20.08% in the last month. It was followed by the International funds category which dipped to 20.07%. The banking sector funds also had a downfall not only because of the corona virus threat but also because of the non performing assets crisis. The gold funds category is the only sector which has given positive returns in the last month.

 

Winding of 6 mutual fund schemes by Franklin Templeton:

Franklin Templeton, the leading global investment management company announced the winding up of 6 mutual fund schemes on 23rd April, 2020. 

Fear of Investors:

All these issues have led to fear in the minds of investors making them pull out Rs. 9,000 crores out of the credit risk mutual fund schemes. As per the data collected by Pulse Labs, the asset under management of these mutual funds have dropped by 19%.

A lot of tension can be seen in the credit risk fund category because of the redemption and unavailability of liquid underlying assets. The HDFC credit risk fund has the highest loss in comparison with other credit risk funds. The asset under management of the credit risk funds show the tremendous depth in comparison to the last month.

Lakshmi Iyer, chief investment officer of debt, Kotak Mutual Funds said to the media that without even considering the quality of the portfolio, investors have started redeeming the money from the funds. One of the ICICI Prudential spokesperson said to the media that the company assures the portfolio is well differentiated on the asset side and liability side.

 

RBI’s help:

RBI has recently announced rupees 50,000 crore special liquidity funds for Mutual Funds. This was announced after the winding up of 6 mutual fund schemes by Franklin Templeton. It is a measure taken by RBI to calm down the investors and reduce their panic by providing a guarantee of having adequate liquidity to meet the redemption. These funds can be borrowed by the companies from banks at a repo rate of 4.4% for 90 days. The Targeted Long Term Repo Operations is to help several financial services companies to manage their cash flow problems amid COVID-19 outbreak.

 

 

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SEBI and RBI review situation after Franklin fiasco

SEBI, RBI review situation after Franklin fiasco

The RBI and SEBI look to determine the damage from Franklin Templeton’s decision. After their decision to close six debt funds, RBI and SEBI look to contain the fallout from this decision. Franklin Templeton’s decision has raised concerns that investors will withdraw from similar categories across the industry.

RBI’s take on Franklin Templeton’s decision:

The RBI may change rules to encourage banks to borrow more. Through the reverse repo window, RBI may limit the amount it absorbs from banks. The amount may be set at Rs. 2 lakh crore. With banks parking Rs 7 lakh crore from reverse repo, RBI believes there is enough liquidity. To deal with liquidity positions and redemption, RBI officials has communicated with fund managers and banks. One of the proposals was to goad banks to purchase bonds of firms that are investment category. The bonds should not be triple-A rated.

SEBI seeks details from mutual funds:

SEBI also needs information from mutual funds regarding liquidity position and extent of redemption from their debt schemes portfolio. Based on current portfolios, SEBI wants to determine whether mutual funds can handle huge redemption. They also want to know the position of mutual funds regarding debt fund liquidity and days required to liquidate holdings. Debt mutual funds capital is estimated at Rs. 12 lakh crore approximately. According to estimations, Franklin Templeton froze about Rs. 55,000 crore of this credit funds.

Mutual funds approach:

To contain the fallout, mutual funds have also sought help from finance ministry and Niti Aayog for measures. RBI believes there is enough liquidity for fund houses and it is only a matter of channelizing it. However, Fund houses desire to have a separate lending window. The reverse repo rate has already been cut down to 3.75%.

On April 24, mutual funds sold a few top-rated securities assuming the pressure of redemption in the coming days. In the bond market, risk aversion led to yields higher than normal by 20-30 points on April 24.

A few of the large mutual funds persuaded SEBI to boost the borrowing limit. This increase is sought due to the COVID-19 pandemic causing financial markets to freeze as there are sharp outflows. These outflows are from different debt products.

Franklin Templeton stop redemptions:

Following the massive outflows in the last 2 months, Franklin Templeton were compelled to stop redemption. Franklin Templeton has mostly low rated papers in the rest of the portfolio. They only have a select number of buyers in the current market. They have also drained the lending limits in these schemes with banks.

RBI’s inquiry:

RBI inquiry to the mutual find industry is to assess the loan amounts taken from banks. They also need information on the ‘lines of credit’ used by asset management companies and the ‘un drawn lines’. These details are required for March 31 and April 24. To meet the other payout and redemption demands, mutual funds are granted to borrow 20% of their capital from banks. If this limit is exhausted, a raise up to 40% is allowed by SEBI based on merit.

Majority of the mutual funds except Franklin Templeton has not even utilized the 20% limit after RBI pumped money. The money was injected through long-term repo operations (LTRO) in to the system in March.

As of April 23, the borrowings of four mutual funds including Franklin Templeton was Rs. 4,427 crore. On March 31, the assets under debt schemes of the mutual fund industry was Rs. 10.3 lakh crore. This figure is 16% less from the earlier month.

 

 

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