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In these turbulent times when uncertainty has gobbled up whole of the market. With all the production processes halted and oil being left unused in the storages the shadow of a deep-rooted economic crisis is lurking over the world. With no production there is no momentum in the banking sector, which is largely dependent on the credit requirement of the firms in order to channel their operation cycles. And this has lately affected the Mutual Fund industry of India, conventionally Mutual funds are considered much safer than company shares as they are exclusively managed by portfolio managers to keep the goal in mind. However, there are a few types of Mutual Fund schemes that don’t exhibit such a safer return, especially during a worldwide pandemic. Mutual Fund schemes which invest in anything less than a AAA rating instrument are to be considered volatile during the worldwide lockdown. MFs which incorporate a credit instrument with higher risk can be troublesome when there is no production in the economy.

Franklin Templeton India recently closed 6 of its Credit Funds based on Mutual Fund schemes. The COVID-19 crisis has hot the firm at its low when the company has been facing a steep fall in its share value worldwide. From February 2020 to the present date the company has lost around 40% of its share value at NYSE.

The Franklin-Templeton Fiasco

The six funds to be closed by the Franklin Templeton India are-

1. Franklin India Low Duration Fund,
2. Franklin India Dynamic Accrual Fund,
3. Franklin India Credit Risk Fund,
4. Franklin India Short Term Income Plan,
5. Franklin India Ultra Short Bond Fund, and
6. Franklin India Income Opportunities Fund.

 

These MFs operate as Credit Funds investments having investments either in AA rated or A+ rated instruments, which are considered a high-risk investment with higher returns. A majority of what is in the form of debt funds. Debt funds are a form of credit extended to corporates against commercial grade bonds, commercial papers (CPs), debentures of certificates of deposit (CoDs). Amidst the COVID-19 crisis, these high-risk investments have been falling due to the nature of debt obligations of corporate borrowers which is in shallow waters due to the lockdown and halted operations.

The fiasco of these MFs was long overdue as these funds had collectively lost Rs.16,804 cr. as AUMs (Asset Under Management, net investments managed under any scheme) from August 31, 2018 to March 31, 2020. But the fall was steeper recently, due to the lockdown, from March 31, 2020 to April 20, 2020 these funds faced a redemption pressure of Rs.4,075 cr.

 

The fiasco began when IL&FS defaulted on its loan obligation to DSP credit risk fund, which was a part of these Credit Funds Mutual Funds operated by Franklin Templeton India. After IL&FS other businesses including Reliance Communications, Essel Group and Vodafone-Idea performed poorly after the hit of COVID-19. This was coupled with the liquidity requirements of corporates and HNIs due to the halt in economic activities, these investors decided to sell off these riskier investments.

The result was a fall of around 22% in the NAV of these 6 MFs, burdening the mom and pop investors with the losses or falling profits. This initiated a wave of redemption from investors and speculators withdrawing their funds from these funds. Franklin Templeton initiated a Line of Credit (LoC) in order to facilitate these payment requirements, which was insufficient to fulfill the obligation this forced the firm to illiquid the Mutual Funds, meaning what were once a popularly traded open-ended Mutual Funds were now frozen for any further transaction.

If you look closely this failure is a replica of 2008 US sub-prime crisis and the Indian regulators have opted for a very similar solution as TARP (Troubled Assets Recovery Plan) and Quantitative Easing (QEs) as employed by UD Fed.

Today, RBI has initiated a Special Liquidity Facility for Mutual Funds, extending Rs.50,000 crores to struggling Mutual Funds operators to willful their liquidity requirements against the collaterals collected by these MFs from their borrowers. The Mutual funds will now have some liquidity for their payment obligations, meaning the investors of these MFs have a ray of hope for recovery of their investments.


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