Mutual Funds: RBI to give Rs. 50,000 Crores to Mutual Fund Industry

Finance

On April 23, Franklin Templeton scraped its open-ended debt funds resulting in insecurity in the market. RBI announced Rs. 50,000 Crores fund for special liquidity fund for Mutual Fund.

The Reserve Bank of India (RBI) on 27 April, Monday raised a special liquidity facility of Rs 50,000 Crore for mutual funds. This step is taken by RBI to bring confidence amongst the parties involved in mutual fund transactions.

After the act of scraping the open-ended debt funds by Franklin Templeton, the mutual fund industry in India experienced fear amongst the concerns. Franklin Templeton also barred the withdrawal of money from these mutual fund plans. This increased fear amongst investors. These six schemes are Franklin India Low Duration Fund (FILDF), 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 (FIIOF).

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How can the sector use this fund?

To bring back the confidence of the concerns, RBI took the step of raising a special liquidity facility. The sanctioned amount of Rs. 50,000 Crores would be utilized as a cash instrument by the mutual fund industry.

The benefits of the scheme can be utilized by the sector from April 27, 2020, till May 11, 2020, or up to the utilization of the allocated amount, whichever is earlier. During the span, RBI will review the need for extension in the timeline. Reserve Bank will also make an amendment in the amount offered in the scheme if required. RBI will review the market conditions, in between to take further decisions.

RBI said, “Heightened volatility in capital markets in reaction to COVID-19 has imposed liquidity strains on mutual funds (MFs). It has intensified in the wake of redemption pressures related to the 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 further said, “Under the SLF-MF, the RBI shall conduct repo operations of 90 days tenor at the fixed repo rate.” (Source: https://www.moneycontrol.com)

As per RBI, the funds sanctioned against the scheme can be used by the banks to meet the liquidity requirements of Mutual Funds. Banks can do this by offering loans, executing the purchase of repos, against the Bonds, commercial papers, debentures, and Certificates of Deposit held by Mutual Funds.

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Fear amongst Investors

Due to the COVID-19 pandemic and lockdown in numbers of countries across the world, the finance sector is undergoing troubles. Investors are also under panic situations about the status of their hard-earned money. Few impacts have been observed on the mutual fund market:

  • Liquidity in the mutual fund and bond market decreased   
  • Yields of debt securities have risen
  • The abilities of companies to service their debt is diminished
  • Redemption requests have risen in the mutual fund industry

Investors are also brought under the umbrella of the safety of their funds, by their portfolio managers. Many investors are still showing trust in the market and waiting for the market to come back. The majority of investors have shown confidence in achieving the V curve in the market by sometime next year.    

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