Mutual fund distributors body wants RBI to buy troubled portfolios from fund houses, pay investors

By: |
May 7, 2020 6:40 PM

In the wake of Franklin Templeton wounding up six of its debt mutual fund schemes, India’s largest mutual fund distributors body has urged the Reserve Bank of India to set up a SPV to buy portfolios from troubled fund houses and pay off investors.

In September 2018, the mutual fund industry had seen outflows of Rs 2.30 lakh after the IL&FS crisis.Although the central bank has stepped in to provide liquidity and has even reduced interest rates, FIFA said that the effort, through banks, has only helped the AAA segment.

In the wake of Franklin Templeton wounding up six of its debt mutual fund schemes, India’s largest mutual fund distributors body has urged the Reserve Bank of India to set up a Special Purpose Vehicle (SPV) to buy portfolios from troubled fund houses and pay off investors. The Foundation of Independent Financial Advisors (FIFA) in a note addressed to the Finance Ministry, SEBI, RBI and AMFI stressed on the liquidity crunch faced by the fund houses that are facing panic redemption after the Franklin Templeton fiasco that left 3.25 lakh investors in the dark.

Although the central bank has stepped in to provide liquidity and has even reduced interest rates, FIFA said that the effort, through banks, has only helped the AAA segment of the markets and not the space which is stressed and facing liquidity issues. “Subsequent to the announcement of winding up of the schemes of Franklin Templeton, the RBI announced further liquidity measures to provide liquidity to mutual funds but this too has been provided via the banks,” the mutual fund distributors’ body said. Not providing direct liquidity support to the non AAA segment could turn the liquidity crisis into a solvency one, according to FIFA. The request to set up an SPV to take over portfolios would help investors get some liquidity on hand. “The underlying investments can subsequently be liquidated by the SPV or held to maturity with the portfolios currently having double digit yield to maturities,” FIFA said.

Alternatively, it has been suggested that either RBI, Government, insurance companies or banks buy the non AAA debt securities from fund houses to help them meet the redemptions. FIFA has also urged the regulators to ensure that Franklin Templeton liquidates its portfolios at the earliest to help investors get funds currently stuck after the wounding up of the six debt fund schemes last month.

Since the wounding up of the six debt funds, investors across the mutual fund industry have been redeeming their units as a panic reaction. After the closure of the funds, Franklin Templeton has assured investors that it will sell the portfolios at the best possible time to ensure maximum returns for the unit holders. To help struggling mutual funds, the central bank has made Rs 50,000 crore available to the banks through its targeted long-term repo operations 2.0, to lend to struggling NBFCs. 

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