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Following the sudden closure of six debt funds by Franklin Templeton, the Association of National Exchanges Members of India (ANMI) has asked the government to look into the debt investment portfolios of all the mutual funds (MFs) and gauge the kind of risk the industry is carrying.
The ANMI call holds significance as MFs have been meeting debt fund redemptions by borrowing from banks rather than selling the debt instruments to pay investors, leading to distortions in NAV calculation. They are not able to sell the debt papers in the secondary markets due to lack of liquidity.
ANMI President Vijay Bhushan told BusinessLine that redemption pressure apart, MFs are not getting fresh inflows into debt schemes, adding to their woes.
In the case of Franklin Templeton, Bhushan said, the average assets under management (AUM) was at ₹1.16-lakh crore in the March quarter, but had subsequently fallen to ₹86,000 crore; of this, ₹31,000 crore was in fixed income.
Despite SEBI allowing MFs to borrow up to 20 per cent of their assets, he said, Franklin Templeton has not been able to meet redemption pressure and had to wind up six schemes.
Credit risk fund category
Interestingly, Bhushan said, of the six schemes that have been shut, some do not qualify to be classified under the credit risk fund category.
Even though banks are flush with funds it has to be seen whether they are willing to lend to MFs in this current status, he further said. The Finance Ministry and SEBI should segregate funds with high-risk portfolios to protect the interest of small investors and extend a helping hand to the fund houses that cannot meet redemption pressure, he added.
While most of the ‘smart money’ has already moved out of debt funds, corporates’ treasuries will also start filing for redemption as they do not want to carry any risk. Earlier, corporate investors saw defaults of even AAA rated IL&FS papers, said Bhushan.
The AUM of debt funds including that of liquid schemes works out to about ₹12.30-lakh crore as of March end.
As it was done in the case of YES Bank, the government and SEBI should move fast to stem the rot in debt funds and instil investor confidence in MFs, Bhushan added.
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