Regulators to the rescue of mutual funds
The Reserve Bank of India (RBI) has announced a special liquidity facility of ₹50,000 crore for mutual funds to ease pressure on them, which are facing liquidity strains to volatility in capital markets in the wake of the Covid-19 outbreak.
What was the need for the measure?
The ₹50k crore lifeline comes after six yield-oriented debt mutual funds were closed by Franklin Templeton Fund House with effect from April 23 citing lack of liquidity amid the ongoing pandemic.
The six funds 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
As the funds have been wound up, investors cannot make any transactions or withdrawals in the same. The day the fund house gets any interest or maturity proceeds from any of the holdings in these schemes as and when they mature, it will be distributed equally to all investors.
To the rescue
The panic started with regards to the debt market as a whole after one of the biggest fund houses in the country wound up the debt schemes — to which the central bank said that liquidity strains are confined to the high-risk debt mutual fund segment at this stage and added that the larger industry remains liquid.
Now, here are some points to know about the special liquidity scheme.
The liquid facility will be effective from April 27, 2020, to May 11, 2020, or up to utilization of the allocated amount, whichever is earlier. The timeline and the amount would be reviewed depending on market conditions.
- The RBI will provide the funds to banks which are to be used exclusively for meeting the liquidity requirements of mutual funds under this scheme. Banks can extend loans to the MFs against the collateral of investment-grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by them.
- Under the facility, the RBI will conduct repo operations of 90 days tenor at the fixed repo rate. Banks can submit their bids to avail funding on any day during working days.
On the other hand, ET reported that market regulator SEBI has sought details from the fund houses on their debt funds portfolio’s redemptions and liquidity position, to know whether they were in the position to handle probable mass redemptions.
Last week, SEBI had relaxed valuation norms on money and debt market instruments held by mutual funds. It said that delay in interest or principal amount or extension of maturity of security due to lockdown, should not be considered as default for valuing debt market securities held by fund houses.
Last month, the Securities and Exchange Board of India (SEBI) had also tightened rules on short selling to curb the heightened volatility due to the coronavirus crisis.
Hopefully, these measures will help improve investor sentiment and improve the funds’ performance.
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