In an unprecedented move, Franklin Templeton Mutual Fund has decided to wind up its six debt schemes in India, citing redemption pressure and lack of liquidity in bond markets due to the COVID-19 pandemic.
This is the first instance in which a fund house is shutting its schemes because of the coronavirus related situation, PTI reports.
The fund house's decision to wind up six debt schemes is a matter of "grave concern" to investors, mutual fund industry and financial markets, senior Congress leader P Chidambaram said on Saturday, 25 April, urging the government to act promptly to resolve the issue.
"I recall that a similar situation arose in the first week of October 2008 (during the global financial crisis) when mutual funds faced liquidity stress. Government immediately consulted RBI, SEBI (Securities and Exchange Board of India), IBA (Indian Banks' Association), AMFI (Association of Mutual Funds in India) and others. On the next morning, officers of RBI and SEBI met at 8 am, and RBI announced a 14-day special repo facility and allowed an additional 0.5 per cent of NDTL. The situation was resolved," the former finance minister said.
WHAT DOES THIS MEAN?
This means that investors will not be able to make any fresh purchases in the funds. For those who have already invested, their money will remain locked in these funds until maturity. Rs 30,800 crore of investors’ money will be locked in, NDTV reports.
The six funds in question are:
- Franklin India Low Duration Fund
- Franklin India Dynamic Accrual Fund
- Franklin India Credit Risk Fund
- Franklin India Short Term Income Plan
- Franklin India Ultra Short Bond Fund
- Franklin India Income Opportunities Fund
These are high-risk, high-return schemes that, typically, individuals with high net worths, corporate investors and retail investors invest in, due to the higher returns offered by such funds and easy liquidity.
However, these are less volatile than equity markets.
Market participants are now concerned that the current situation may also impact other debt schemes and have a ripple effect.
"This is a very serious issue as it reflects that the debt markets have frozen and prices have got distorted. In this scenario, it could also have an impact on the real economy," Sandip Sabharwal, a fund manager, told NDTV.
He added that the RBI needs to step in and act immediately so that the effects are contained and don't become market-wide.
WHY DID THIS HAPPEN?
"There has been a dramatic and sustained fall in liquidity in certain segments of the corporate bonds market on account of the COVID-19 crisis and the resultant lockdown of the Indian economy which was necessary to address the same,” Franklin Templeton MF said in a late evening statement on Thursday.
At the same time, mutual funds, especially in the fixed income segment, are facing continuous and heightened redemptions," it added.
“This is the only viable option to preserve value for unit-holders and to enable an orderly and equitable exit for all investors in these unprecedented circumstances.”Franklin Templeton
Markets regulator Securities and Exchange Board of India (Sebi) on Thursday eased the valuation policies for debt mutual funds and asked them not to term a paper as default if the delay in payment of interest or extension in maturity is mainly due to the coronavirus pandemic related lockdown.
(With inputs from PTI and NDTV.)
(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)