Covid-19 hits Indian mutual fund firm

[CrazyZ]

Covid-19 hits Indian mutual fund firm
Citing redemption pressure, Franklin Templeton winds up six debt schemes

by KS Kumar April 25, 2020

Indian office workers wait at a bus stop in Mumbai in front of an advertisement promoting mutual funds. Photo: AFP

The economic disruption brought about by the Covid-19 lockdown has been roiling the Indian stock market since March, but now the contagion seems to have spread to mutual funds – a favorite of risk-averse investors. The country has been under lockdown for nearly a month and it is expected to continue until at least May 3.

In a surprise move, Franklin Templeton Mutual Fund has decided to wind up six debt schemes with a combined asset base of 258.56 billion rupees (US$ 3.4 billion). The Indian arm of the US fund group announced that it was due to redemption pressure and a lack of liquidity in debt markets. The total asset under management of Franklin Templeton in India is 1.04 trillion rupees ($ 13.62 billion) as of March 2020.

Franklin Templeton officials said they were finding it difficult to generate liquidity in the current market scenario and that continuing to operate the funds would negatively impact existing investors. The six yield-oriented schemes in which investments have been stopped include the Franklin India Low Duration Fund, Dynamic Accrual Fund, Credit Risk Fund, Short Term Income Plan, Ultra Short Bond Fund and Income Opportunities Fund.

The funds invest in lower-rated bonds offering high interest rates. Investors will no longer be allowed to make fresh purchases or sales from these funds. The fund house is expected to make payouts to investors in a staggered manner.

Franklin Templeton has been popular with retail investors, particularly senior citizens, as it has generated high yields. It has been in India for 25 years and nearly 33% of its global workforce is based in the country.

This development is expected to create a stir in the debt market and market experts fear many investors will get nervous and redeem their funds. This is expected to put pressure on the debt market.

The industry body Association of Mutual Funds in India has rushed to allay investor concerns regarding debt funds floated by other mutual fund houses. This March the redemption pressure on debt mutual funds was the highest (1.94 trillion rupees or $25.4 billion) for the closing month of any financial year.

Market research firm Capitaline said earlier that retail investors in the Indian stock markets have lost about 3 trillion rupees (US$39.5 billion) in the past three months. In its report it had stated that at the end of December 31, 2019, retail investors – those who have invested up to 200,000 rupees in an individual capacity – held 9.84 trillion rupees ($129 billion) worth of investments as stocks. The value had shrunk to 6.87 trillion ($90.3 billion) as of April 3.

https://asiatimes.com/2020/04/covid-19-hits-indian-mutual-fund-firm/

 

[CrazyZ]

Corona virus just exposed the issues to the point where it couldn't be salvaged. Franklin Templeton managers in India made some risky bets in troubled Indian Telecoms and Yes bank.

 

[Prince Kassad]

So one of 100 debt funds collapsed. This is not even a proper equity mutual fund.

Most good mutual funds have reliance on the portfolio. Yesterday reliance was just 10% away from all time high and 60% up from 2018 levels.

 

[CrazyZ]

So one of 100 debt funds collapsed. This is not even a proper equity mutual fund.

Most good mutual funds have reliance on the portfolio. Yesterday reliance was just 10% away from all time high and 60% up from 2018 levels.

Franklin Templeton is a large American firm. They are closing down multiple funds. The troubling thing is that they mentioned "lack of liquidity" as an issue which could signal broader problems. It also signals problems in Indian telecom's and fintech. Facebook took a gamble in JIO since its growth is slowing and no one is interested in its digital payment platform....but its a gamble.

 

[Prince Kassad]

Franklin Templeton is a large American firm. There are closing down multiple funds. The troubling thing is that they mentioned "lack of liquidity" as an issue which could signal broader problems. It also signals problems in Indian telecom's and fintech. Facebook took a gamble in JIO since its growth is slowing and no one is interested in its digital payment platform....but its a gamble.

Facebook and jio maybe trying to replicate wechat?
Imagine whatsapp pay. boom, Stock should hit 2500 in couple of years

 

[Anik101]

RBI announces ₹50,000 crore special liquidity facility for mutual funds
3 min read . Updated: 27 Apr 2020, 05:19 PM ISTGopika Gopakumar, Jayshree P. Upadhyay

• Banks can avail of 90-day funds from the RBI’s repo window and use it to exclusively lend to mutual funds or purchase investment grade corporate papers held by MFs. The scheme will be available from 27 April till 11 May.

Franklin


MUMBAI : Reserve Bank of India (RBI) on Monday announced a ₹50,000-crore special liquidity facility for mutual funds to calm investor sentiment in the aftermath of Franklin Templeton Mutual Fund winding up six debt funds. The central bank's liquidity window offering acts more as a psychological signal to mitigate investor panic by providing assurances of adequate money to meet redemption pressures.

“Heightened volatility in capital markets in reaction to COVID-19 has imposed liquidity strains on mutual funds (MFs), which have intensified in the wake of redemption pressures related to closure of some debt MFs and potential contagious effects therefrom. The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid," RBI said in its press release.

The money is available to banks which can borrow the 90-day funds from RBI’s at the current repo rate of 4.4% and use it to exclusively on-lend to mutual funds or purchase investment grade corporate papers held by MFs. The scheme will be available from 27 April till 11 May. Banks buying paper from the mutual funds can hold it in their held-to-maturity segment, even if the total investment in that category over-shoots the RBI's limits. The advantage of the segment is that banks do not have to account for mark-to-market losses in case the bond values deteriorate further.

Mint had first reported on Friday that RBI could be looking at a special window to help MFs meet the redemption pressure. As of 23 April, four fund houses had borrowed ₹4,427.68 crore from banks to manage redemption pressure, according to Association of Mutual Funds in India, or Amfi, the mutual fund industry's self regulatory organisation.

“Funding cost will be at the repo rate. Lending rate will depend on whether it is an outright purchase or a line of credit and on the quality of the underlying asset being sold or pledged," said Arvind Chari, Head – Fixed Income & Alternatives at Quantum Advisors Pvt. Ltd

A Balasubramanian, MD and CEO of Aditya Birla Sun life Mutual Fund, said the cost of funding would be anywhere between 7.5-9% depending on the maturities of the paper and schemes. "It is now a question of time when the banks will increase their lending down the credit curve. The RBI has done more than enough to boost liquidity in corporate bond market and slowly we will see these steps trickling down to help the bond market. It is a big confidence booster," said Balasubramanian.

While the RBI liquidity move helps in boosting confidence, it may not have too much of an impact on debt funds with riskier credit in their portfolio. Assuming that the redemptions from these debt funds is permanent in nature, the banks will have to assume credit risk of these bonds in their books. However, banks are likely to offer funding only against collateral where they are comfortable with the risk. Only the bonds which meet the banks’ risk averse criteria in today’s times will benefit from this window, said Chari of Quantum.

In short, this RBI lifeline is available only against securities with investment grade rating.

The result of the recent Targeted Long-Term Repo Operations (TLTRO) conducted by RBI have shown that banks have invested only in high-rated debt papers of companies like Reliance Industries, Housing Development Finance Corporation, Power Finance Corporation, L&T and Mahindra & Mahindra. The TLTRO 2.0 which was opened to meet the liquidity requirement of stressed NBFCs showed that banks have borrowed ₹12,850 crore, a little more than half of the ₹25,000-crore on offer. This is a clear indication of the extent of risk aversion seen in the credit market, despite RBI’s repeated liquidity injection and deep cuts in benchmark rates.

TLTRO was was introduced by the RBI to help companies, including financial institutions, manage their cash flow issues in the wake of the covid-19 outbreak.

In 2008 and 2013, RBI opened a similar window for banks to meet the liquidity requirement of mutual funds. According to bankers, the liquidity window given to mutual funds was used more as a psychological step to calm the market. However, the earlier precedents may not be comparable: the covid-19 pandemic is vastly, and qualitatively, different from earlier financial crises.

 

[CrazyZ]

Indians switch to bank deposits as concerns grow over debt funds
Nupur Anand, Abhirup Roy
3 Min Read

MUMBAI, April 29 (Reuters) - Rattled by the shock closure of some high-profile domestic funds investing in high-yielding debt, Indian investors are quickly moving their cash into the safety of bank deposits.

Bankers told Reuters they have seen heavy inflows into their traditional deposit schemes after one of India’s most prominent mutual fund houses in fixed income, Franklin Templeton Mutual Fund, said last week it was shutting down six credit funds.

Templeton wound up the funds due to a lack of liquidity in markets battered by the coronavirus pandemic. Their combined assets of about 280 billion rupees (almost $4 billion) had large exposures to higher-yielding, lower-rated credit securities.

As spooked investors called for a government intervention and debt mutual funds saw record withdrawals, traditional bank deposits have gained.

“Bank deposits have picked up, as a lot of money that is getting redeemed from mutual funds is also coming to banks now,” said Sumant Kathpalia, CEO of IndusInd Bank.

Flush with cash, banks have cut deposit rates. The weighted-average deposit rate of commercial banks is down 45 basis points since February 2019. Still, bank deposits grew by 9.45% year-on-year in two weeks ended April 10 compared with a 7.93% rise two weeks prior.

While up-to-date figures on the flows into deposits after the Templeton news will only be known next month, growth is expected to remain in low double digits in the coming months, said an executive director at a state-run bank.

Mutual funds investing in debt saw outflows of close to 1.95 trillion rupees ($25.5 billion) last month.

Retail investors have for long been flocking to tax-friendly debt mutual fund schemes on the promise that they are as safe as bank deposits and with little concern for potential credit risks in case of a default.

In 2017, credit opportunity funds, which invest mostly in higher-yielding bonds with ratings below the top AAA investment grade, saw record inflows.

That changed a year later as a string of defaults at a major infrastructure lender sucked liquidity out of the corporate bond market. An economic slowdown in 2019 triggered more debt defaults and exposed fault lines in the credit space.

The tipping point came last month as many investors redeemed their funds to preserve cash during a nationwide lockdown to contain the spread of the coronavirus, and funds such as Templeton took a hit.

Prateek Pant, co-founder of Sanctum Wealth Management, said he was facing a barrage of calls from investors worried about the safety of their debt investments.

“Overall, debt funds as a category is fine. But if you’re really losing your sleep because of that, then go ahead and put that money in a bank right now,” Pant said. (Reporting by Nupur Anand and Abhirup Roy; Editing by Simon Cameron-Moore)

https://www.reuters.com/article/hea...s-concerns-grow-over-debt-funds-idUSL3N2CG1QU

 

[PakFactor]

So one of 100 debt funds collapsed. This is not even a proper equity mutual fund.

Most good mutual funds have reliance on the portfolio. Yesterday reliance was just 10% away from all time high and 60% up from 2018 levels.

Franklin Templeton is a very reputable American Institution, Mutual Funds would try and balance asset allocations so they don't tilt to heavily in a certain company like you mentioned reliance.

To calm investors we might see RBI injecting more liquidity into the markets now -- same was what the U.S. Federal Reserve is doing right now to cushion the impact.