US-based Franklin Templeton Mutual Fund on Thursday announced that it will be winding up six funds in India from April 23, blocking Rs 30,800 crore of investors’ money. Citing severe market disruption and illiquidity caused by the coronavirus, Franklin Templeton stated “the decision has been taken in order to protect value for investors via a managed sale of the portfolio”. The move comes at a time when the rapidly-spreading coronavirus (COVID-19) pandemic continues to batter the financial markets around the globe.
Ten highlights of the development
- As Franklin Templeton is shutting up the funds, investors will not be able to perform any fresh purchases after the effective April 23. To explain it better, any transactions done after the given date will not be processed. For the exciting investors, the money will be locked in the funds until maturity.
- Individuals with High Networth, corporate investors and retail investors invest in debt funds usually as part of their high-income asset allocation due to higher returns offered by such funds in comparison to bank deposits and easy liquidity.
- The funds that are being shut down are namely 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 and Franklin India Income Opportunities Fund.
- The asset manager stated that shutting the funds is the “only viable option to preserve value for investors and to enable an orderly and equitable exit” for all unitholders, and referred to “a dramatic and sustained fall in liquidity in certain segments of the corporate bonds market on account of the COVID-19 crisis and the resultant lock-down of the Indian economy”.
- Fund managers say the news will have significant implications for the country’s mutual funds industry.
- “This is a very serious issue as it reflects that the debt markets have frozen and prices have got distorted. In this scenario, it could also have an impact on the real economy,” Mumbai-based fund manager Sandip Sabharwal told NDTV.
- “The same securities that these funds hold are also held by other fund houses and this could set up a contagion that might become difficult to contain. It is important for the RBI and government to step in and act immediately so that the effects are contained and don’t become market-wide,” he added.
- It has been a double blow for the country’s credit markets. Still trying to recover from the collapse of major infrastructure financier IL&FS in 2018, the credit markets have now been hit by the strict lockdown meant to curb the deadly coronavirus outbreak.
- “The NBFC crisis is snowballing… The RBI has to open direct access to credit to these NBFCs and mutual funds; otherwise, it can impact our rotation of money,” said AK Prabhakar, head of research at IDBI Capital.
- For the moment, several economists opine that the measures announced by the government and the RBI fall short of the support needed to aid the country’s fight against the pandemic. The government has so far announced a spending package of Rs 1.7 lakh crore, whereas the central bank has cut key interest rates, and brought in targeted long-term repo operations to ease liquidity in the system.