The RBI (Reserve Bank of India) on Monday, 27^th April 2020, that is today announced a rescue plan of around Rs 50,000 crore to save mutual funds, after the sudden wind up the decision of six debt mutual funds taken by Franklin Templeton wound up six with an aggregate AUM (Asset Under Management) of Rs 36,000 crore.

Recently that is on 23^rd April 2020, we got a big announcement from Franklin Templeton Mutual Fund that included the wind up of Six Debt Mutual Funds, because of the sudden increase of redemption requests from the investors and increased credit risk on these funds. RBI said that the coronavirus outbreak has taken the volatility in capital markets to its height, and this increased volatility has imposed liquidity strains on mutual funds. Many investors after this huge correction shown by the market redeemed their investment from Debt funds which resulted in the increased liquidity risk.  

After the closure of some Debt Mutual Fund schemes, this liquidity risk has intensified in the wake of redemption pressures. However here RBI also cleared the fact in the notification issued, that the stress is limited to the high-risk debt Mutual Funds, the larger industry is still safe and remains liquid.

Notification issued by the RBI, further included that the central bank will conduct repo-operations for 90 days tenor at the fixed repo rate under the special liquidity facility for mutual funds (SLF-MF).

WHAT IS SLF-MF?

The SLF-MF is an on-tap and open-ended mutual fund, in which banks can submit their bids to avail funding on any day from Monday to Friday (excluding holidays). The scheme is available from today i.e., April 27, 2020, till May 11, 2020, or up to utilization of the allocated amount, whichever is earlier. The Reserve Bank will review the timeline and amount, depending upon market conditions.

RBI further added to its notification that liquidity support availed under the SLF-MF would be eligible to be classified as held to maturity even more than 25% of total investment permitted to be included in the held to maturity portfolio.

WHY THIS STEP HAS BEEN TAKEN BY RBI?

This major step taken by the RBI was the need of the hour and then RBI came up with a rescue plan to save mutual funds, and lower the panic of its investors.

 The market correction since last some weeks already had impacted its effects on investor's minds and then the sudden wind up of six debt funds by Franklin Templeton Mutual fund only added more anxiety in investor's minds. The loss of confidence was seen across the sector. Many financial managers have been appearing on TV interviews to calm their investors; they were trying to reassure their investors.

Therefore this major move taken by RBI at this time was much needed to ease the liquidity stress on the MF industry. However, lenders will be cautious of credit strength before using this facility provided by RBI but this step will definitely be easing of liquidity and would establish the investors’ confidence in Debt Funds once again.

Also, this move will help to lower down the redemption pressure in mutual funds that could have increased high that too in the middle of an illiquid market. After this major rescue plan by the RBI, investors do hope that the RBI would come up with some kind of saving measures for other sectors as well as there are now precedents of specific windows open to NBFCs and mutual funds.

RBI announced liquidity support for mutual funds to bring back confidence and lessen the fear in the minds of investors and that will restrict them from going into redemption mode.   

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Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).