Credit Risk Schemes Account For 5% Of Debt Mutual Fund Assets
The mutual fund industry lobby allayed investors concerns around credit funds after Franklin Templeton shuttered six such schemes citing severe market dislocation and illiquidity caused by the Covid-19 pandemic.
“The action taken by Franklin Templeton is limited to the six specific credit risk fixed income schemes. The assets under management of these schemes constitute less than 1.4 percent of India’s mutual fund industry’s aggregate AUM as on March 31, 2020,” the Association of Mutual Funds in India said in a media statement.
It also assured that majority of fixed income mutual funds’ AUM in the industry is invested in superior credit quality securities and that these have appropriate liquidity to ensure normal operations.
Franklin Templeton Mutual Fund wound up six yield-oriented, managed credit funds from April 23 as it said it was “left with no other option” after the pandemic reduced liquidity in the Indian bond markets for most debt securities and led to unprecedented levels of redemptions.
The six schemes are
- Franklin India Low Duration Fund
- Franklin India Dynamic Accrual Fund
- Franklin India Credit Risk Fund
- Franklin India Short Term Income Plan
- Franklin India Ultra Short Bond Fund
- Franklin India Income Opportunities Fund
AMFI said it was in the process of collecting data to know liquidity of all asset managers in the industry. Most of them, however, informed that they have no outstanding borrowings. The market regulator’s regulations, AMFI said, allow mutual fund schemes to borrow up to 20 percent of their assets to meet liquidity needs for redemption/ dividend payout.
The industry body’s Chairman Nilesh Shah and Directors Milind Barve and A. Balasubramanian joined in a concall to allay investors’ fears.
Here are the key takeaways from the conversation:
- Liquidity, maturity profile and credit quality for debt funds is appropriate for day-to-day operations
- Credit risk fund exposure overall is around 5 percent of aggregate debt AUM
- Not all credit risk funds have higher risk profile
- Most of other credit risk funds have higher credit quality securities and liquidity
- Regulators should do more for providing liquidity towards non-bank financial companies
- Credit risk fund invests 20-30 percent of its portfolio into AAA securities
- 30-50 percent of the funds have invested into AA and AA+ securities
- Around 20 percent of credit risk funds are invested into below AA securities
- Average AUM of the credit risk category stands Rs 50,000 crore
- Total debt funds’ AUM stands at Rs 10 lakh crore as on March 31, 2020
- Yields are very high even in high-quality securities fund
- MFs have gone through tough period since FY18 but have come a long way
- Enough liquidity in the system has been ensured by the regulators
- Investors will be impacted if they would panic given the lower repo rates
- Don’t see more concerns related to credit risk funds
- Isolated incidents shouldn’t be constituted negative for the entire debt industry