The regulator had also observed that mutual funds should not depend totally on credit rating agencies but should do their own assessments.
Investors could lose a big chunk of the Rs 25,800 crore worth of assets held in the six debt schemes that Franklin Templeton is winding down. With no redemptions possible, investors will have to be satisfied with whatever amount the fund house is able to recover by liquidating the investments.
While Franklin may be able to recover the money from the better-rated companies, financial experts pointed out the portfolios have several dud investments. “Fund managers have bought junk in their chase for high yields,” observed an expert.
The debacle at Franklin could lead to redemptions from other debt schemes although senior fund managers on Friday attempted to play down the event pointing out the amount was a small fraction of the total debt investments with mutual funds of Rs 15 lakh crore.
Mutual funds have been in trouble over the past year over defaults with SEBI frowning upon measures such as standstill agreements with borrowers saying the regulations did not permit them. The regulator had also observed that mutual funds should not depend totally on credit rating agencies but should do their own assessments.
As cash flows weaken and balance sheets become more stressed there are increasing chances of companies not being able to repay loans. On average, rating agencies are downgrading 20 companies a day due to their weakening financials. Franklin said in a statement on Thursday, the action was limited to the schemes which have a material direct exposure to the “higher yielding, lower rated credit securities” that have been most impacted by the ongoing liquidity crisis.