Hyderabad: Mutual fund industry body Association of Mutual Funds in India advised investors to remain invested in mutual funds to create wealth over the long term.
Following the announcement by Franklin Templeton of winding up of six credit risk fixed income schemes, AMFI assured investors that majority of fixed income mutual funds assets under management (AUM) is invested in superior credit quality securities and schemes have appropriate liquidity to ensure normal operations.
Franklin Templeton Mutual Fund had announced voluntary wind-up of six schemes due to market dislocation impacting the Indian credit markets.
The schemes include Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Short Term Income Plan, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund and Franklin India Income Opportunities Fund.
The wound-up comes in the wake of fall in liquidity across the bond market caused by the pandemic and lockdown of the Indian economy.
Franklin Templeton said the decision to close the six yield-oriented schemes was in interest of investors as this would preserve value for unit holders. No transactions would now be possible in these schemes and the fund house would dispose-off assets and the realised value will be distributed to existing unitholders in proportion to their respective claims. It clarified that while its schemes were able to adhere to redemption obligations during the initial phase of the crisis, however, the unprecedented situation has put these schemes under stress. The fund house feels it would no longer be able to generate adequate liquidity to fund redemptions.
It had also explored temporary suspension of redemptions until stable market environment restored, selling securities at a discount to meet redemption requests and elongate the redemption payment. However, possible erosion of value and inadequacy to meet redemptions rendered these approaches unviable.
According to Franklin Templeton, the securities held in these six funds remain sound and they will try to liquidate the portfolios at the earliest at the best possible values. Further, once there comes a recovery in the market, the fund house will explore the option of early exits via sale/prepayment to aid repayment prior to the maturity of the portfolio investments.
According to AMFI, the AUM of these six schemes constitute less than 1.4% of the Indian mutual fund industry’s aggregate AUM as of this March end.
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 is in the process of collecting the data, many Mutual funds have informed that they do not have any outstanding borrowing, AMFI said
“We expect fixed income funds across mutual fund industry to continue their normal operation without any material impact,” said Nilesh Shah, Chairman, AMFI.
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, Shah said.
NS Venkatesh, Chief Executive, AMFI, said “Investors continue to repose trust in the industry and over the last 5 years the Indian MF industry AUMs have doubled from Rs 11.88 lakh crore as of March 2015 to Rs 24.7 lakh crores of AUM as of March 2020.”
Omkeshwar Singh, Head- RankMF, Samco Securities, said debt funds are dominated by corporates and HNIs from investment side. Most corporates, due to Covid 19 lockdown, have liquidity issues and are therefore redeeming debt mutual funds to meet cash requirements.
Retail Investors should be prudent while investing in debt funds and should look for quality of portfolio and ignore past performance, big names and big brands while making investments. “Investors have no choice but to wait so that liquidity gets back to the lower end of the system as and when the lockdown is over and economic activities start,” he said.
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