The major reason for closure of six debt schemes by Franklin Templeton India was lack of liquidity in market in view of increasing redemption pressure from investors.
There are three sources of fund for any Mutual Fund AMC to access liquidity to address redemption requests from investors.
1. New fresh investments by investors in that scheme
2. Sell of underlined securities/units
3. Raise loan (20% of AUM is allowed as per rules)
In present Covid-19 crisis, no fresh investments are coming and sell is not option unless it’s at loss. Raising loan is expensive option and cannot have much needed runaway to AMCs.
The biggest risk, post Franklin Templeton episode, was spread of contagion of closure to other debt funds. It would have been disastrous.
Today’s move by RBI is well timed and well intended.
As announced by the Reserve Bank of India (RBI)the special liquidity facility of ₹50,000 crore would be effective from today till May 11, 2020 or up to utilization of the allocated amount, whichever is earlier. RBI has assured further intervention if needed.
Mostly, the liquidity concern is in debt funds that too risky funds like credit risk funds. With this announcement, mutual fund industry and investor will have major relief.