Franklin Templeton shuts 6 MF schemes. Should you worry?

Industry body Association of Mutual Funds in India on Friday assured investors that a majority of fixed income mutual funds assets are invested in superior credit quality securities and such schemes have appropriate liquidity to ensure normal operations. 

The statement by the industry body came after Franklin Templeton Mutual Fund voluntarily decided to wind up its six debt schemes citing redemption pressure and lack of liquidity in bond markets due to the coronavirus pandemic. 

This is the first instance when a fund house is shutting its schemes because of coronavirus-related pandemic. 

The industry body, in a statement, has strongly recommended that investors should continue to focus on their investment goals, consult their financial advisor and not get side-tracked by an isolated event in a few schemes of one fund company. 

“We expect fixed income funds across the entire mutual fund industry to continue their normal operation without any material impact," it added. 

The action taken by the particular AMC is limited to the six specific credit risk fixed income schemes managed by the said asset management company due to the illiquidity of their portfolios, Amfi said. 

The assets under management (AUM) of these six schemes constitute less than 1.4 per cent of the Indian mutual fund industry's aggregate AUM as on March 31, 2020. 

"Fixed income schemes of most mutual funds have superior credit quality as confirmed by ratings of independent credit rating agencies and continue to remain fairly liquid even in these challenging times," it added. 

Sebi regulations allow mutual funds schemes to borrow up to 20 per cent of their assets to meet liquidity needs for redemption/dividend pay-out. While Amfi said it is in the process of collecting the data, many mutual funds have informed that they don't have any outstanding borrowing. 

It said that liquidity, maturity profile and credit quality for debt funds is appropriate for day-to-day operations to continue uninterruptedly. 

“Banking liquidity in excess of Rs 7,00,000 crore, Long Term Repo Operations (LTRO) conducted by the RBI, expectations of further rate cuts and Operation Twist by the RBI is likely to keep bond market liquid and normally functioning in current challenging times,” Nilesh Shah, Amfi chairman, said. 

"The mutual fund industry remains fully committed to investor interests and there is no need for them to panic and redeem their investments. The industry continues to remain robust like in 2008 sub-prime crisis or 2013 taper tantrum crisis,” he added. 

NS Venkatesh, chief executive at Amfi, said that the industry has seen many cycles and its professional fixed income fund managers have managed crises efficiently over the years. 

“Most credit risk funds have pretty good credit quality and sufficient liquidity in today's challenging times and continue to remain an attractive investment option for investors,” he added. 

During the past five years, the industry average assets under management (AAUMs) more than doubled from Rs 11.88 lakh crore as on March 31, 2015 to Rs 24.70 lakh crore of AAUM as on March 31, 2020. 

The 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 coronavirus pandemic related lockdown.

Illustration: Dominic Xavier/Rediff.com.