Opinion | Bond market woes and RBI’s debt mutual fund rescue

On Monday, the Reserve Bank of India (RBI) opened a special window of 50,000 crore for mutual funds (MFs) to tide over a liquidity crisis that has shaken investor confidence in one of India’s most popular modes of retail investment. The market had been anticipating it. Mint made a case for RBI aid in a Saturday Quick Edit on Livemint.com. Also, calls arose over the weekend asking for the central bank to do what was done in a similar situation back in 2009. The crisis that erupted late last week involved only debt funds, which had 11 trillion in assets under management (half of the MF total); even within the debt segment, the crisis was restricted to schemes with money in bonds that were investment grade but not rated triple-A (supersafe, that is), nor issued by the government (the safest kind). Unusually high redemptions were seen in this sub-category, the result of a mix of events that can be traced to India’s lockdown. There was a surge in demand among MF holders for cash, not just among firms and individuals to make year-end tax payments, but also in response to squeezed inflows. So badly strapped did this leave Franklin Templeton AMC for payout funds, that despite borrowing 4,000 crore from banks, this asset management company froze six of its schemes last week and six more after that, trapping the money of its investors.

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Opinion | The backstory of reserve bank of India’s cash window for mutual funds

In the weekend that went by, little housework got done in the homes of officials of the Securities and Exchange Board of India (Sebi), Reserve Bank of India (RBI) and some fund house leaders. On Friday, 24 April, the full impact of an announcement late the previous night by Franklin Templeton Mutual Fund was digested by the markets, regulators and investors. The fund house had frozen six of its high-yield debt funds with over 30,000 crore of investor money. Friday saw panicked investors, some on the advice of bank wealth managers, selling their credit funds across fund houses without a thought to how much risk they really carried. The panic threatened to spill over to other non-credit risk debt funds as well. Mutual funds have a certain calculation of how much redemption will take place on a day and have cash ready for that. But when there is a sudden rush of redemptions, funds can borrow up to 20% of their net assets to meet this redemption. What happened with Franklin Templeton MF is that even with that borrowing the sell requests piled up, leading to this first-of-its-kind decision to freeze the funds.

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Money with Monika. S4 E5. Why did Templeton kill 6 of its debt funds?

Money with Monika. The Corona Conversations
S4 E5
Why did @FTIIndia kill 6 of its debt funds