Amid the coronavirus outbreak, fear of another contagion has spooked debt fund investors.
Over the last few hours, many of your clients must have called you to redeem their investment in debt funds, as they fear what happened to Franklin Templeton’s (FT) six debt schemes could happen to their fixed income investments as well. Like Franklin Templeton’s 6 debt schemes, will their debt schemes be closed for purchase and redemption because the covid-19 pandemic has created a liquidity crunch in the debt space?
To clear the air on such questions, AMFI has reassured that fixed income schemes have superior credit quality as confirmed by ratings of independent credit rating agencies and continue to remain fairly liquid even in these challenging times.
Nilesh Shah, Chairman of AMFI and MD of Kotak MF, said in a press conference that the Franklin Templeton episode is an isolated event and it will not have a bearing on the functioning of the entire MF industry. He said that distributors should share this message with their clients.
Moreover, he assured that factors such as banking liquidity in excess of Rs 7 lakh crore, Long Term Repo Operations ( LTRO ) conducted by the RBI , expectations of further rate cuts and ‘operation twist’ by the RBI are likely to keep bond market liquid and normally functioning in current challenging times. The mutual fund industry remains fully committed to investor interests and there is no need for them to panic and redeem their investments, he added.
Milind Barve, MD, HDFC MF also assured that the recent episode at Franklin Templeton does not mean the entire MF industry would face similar problems. He said that only around 5% of the MF industry’s entire fixed income assets is in risky debt instruments that are below AA. In fact, even in their credit risk fund only around 20-25% of the scheme’s corpus is invested in instruments that are rated below AA.
A. Balasubramanian, MD and CEO, Aditya Birla Sun Life MF also have similar views. He said that the majority of fixed income schemes have appropriate liquidity, maturity profile and credit quality to continue their day-to-day operations uninterruptedly.
We also spoke with some advisors to understand what MF distributors should tell clients at this point. Vishal Dhawan of Plan Ahead Wealth Advisors said that FT had to wind up their 6 debt schemes because they had a higher exposure to ‘risky’ debt instruments. Advisors must explain to their clients that in the mutual fund industry, majority of the debt assets are in better quality papers i.e. AAA rated bonds or government securities or treasury bills or bank CDs. Therefore, there is no need to panic at this point. However, if distributors have recommended schemes that do not have exposure to high quality papers, they must rejig their client’s portfolio, he said.
Suresh Sadgopan, founder of Ladder7 Financial Advisories, also has similar views. He said that clients need to be informed that the one-off event is very unlikely to snowball into an industry-wide crisis.
Here are some key messages that you should convey to your clients
- Franklin Templeton MF episode is a one-off event and will not have a bearing on the functioning of the entire MF industry
- The MF industry has put several checks and balances to deal with redemption pressure if any
- Most of the assets of fixed income schemes have been invested in high rated papers
- Only 5% of MF industry’s fixed income corpus has been invested in debt papers having credit rating of less than AA
- In fact, most credit risk schemes have only up to 25% exposure to risky papers even though these funds are allowed to invest majority of their corpus in high risk papers
- There will be no contagion impact of this episode on other debt schemes
