Franklin Templeton India, an American based asset management company with 600 investment professionals in 25 countries has declared that it closed the six debt funds sending shock waves among investors as no investment will be allowed in them and investors will be paid proportionally as and when assets are realised.
No need to panic. As we all know Rupert H Johnson Senior who was running retail brokerage business, started Franklin Templeton in Newyork in 1947. The name was derived from Mr Benjamin Franklin, whose investment decisions were liked by Rupert.
Now the second generation of his family Mr Jennifer, Gregory and Rupert Junior are running the mutual funds business in 170 countries with 9700 staff and 600 professionals. The combined data of all countries is available.
In India, it started operation in 1996 with offices at Mumbai, Chennai and Hyderabad. It occupies 10th place in India with Rs.1.9 lakh crore assets, out of 44 MF companies lead by ICICI Prudential with Rs.3 lakh crore Assets Under Management.
I am writing in a simple language so that all can understand a crucial emerging problem which may change the entire Financial Sector in India. People prefer mutual funds because most of the schemes are Open-Ended, that means at any time investment is permitted without any limits and exit any time. Moreover, the yield in MF is generally more than the Bank deposit rate for SB account or FD.
There are three types of schemes 1. Equity Fund, 2. Debt Fund and 3. Hybrid Fund. Minimum of Rs.500 per month under Systematic Investment Plan (SIP) also can be used, which attracted the middle class.
COVID 19 Effect
Due to widespread of COVID 19, virus Lockdown was declared by Central Government from 24-3-2020 to 14-4-2020 for 21 days. The same was extended till 03-05-2020, with some relaxations in nonaffected areas. But still, 90 % of the manufacturers, contractors, builders and professionals and small businesses were closed.
COVID 19 Affect on Banking
Due to Lockdown, no industrial activity was there for the last 30 days and none of the business people or manufacturing companies availed their sanctioned limits also fully. The term loans sanctioned in January and February 2020 also not fully disbursed.
So funds are available with banks due to low credit growth. Another problem is that the salary credits in middle-class employees are not fully utilised as no Cinema, no malls, no tours and travels, no worships of Almighty, no Birthday parties, no marriage function etc.
So banks have surplus funds in SB account and Current account. Say around Rs.5.20 lakh crores just like in Demonitisation period.
Loopholes in RBI policy
RBI declared that to maintain liquidity and lending more amount to needy people two major announcements were 1. Reduction of Cash Reserve Ratio to 3% from existing 4.0% thereby funds of Rs.1.35 lakh crore released to banks and 2. Reverse Repo Rate decreased to 3.75% from4% to discourage banks to invest excess funds with RBI.
But what banks thought
SB account interest rate was reduced to 3% by all banks and FD rates reduced by 0.5%. For current accounts, no interest will be paid.
So banks thought that since credit growth is not there it is better to invest excess funds in SB account and Current account with RBI at Reverse Repo rate of 3.75% which gives profit margin for them. 3.75% >3% so calculation is simple.
Had RBI made Reverse Repo Rate 0.5% banks might have held huge funds or at least canvassed Gold loans on ornaments. In America, FED rate was reduced to 0.25% only. So banks are lending the funds instead of dumping in Federal Bank ( their Central Bank ).
Effect on Mutual funds
Corporates are not using even sanctioned funds. Sanctioned term loans including housing loans also not fully disbursed. So there are no takers of advances from Mutual Funds companies.
People invested heavily in debt funds to be paid some assured interest in some schemes and flexible amount in some other schemes. If fund schemes are not closed now, more people may invest funds from idle bank accounts.
So Franklin Templeton India thought it better to close the open-ended schemes for time being. Moreover, some corporates not availing the advances fully from mutual funds are paying back a portion of advances say 30% to 40%, so liquidity became excess. So the only solution they thought is to close the six debt schemes
- FT India Low duration Fund
- FT India Dynamic accrual Fund
- FT India Credit Risk Fund
- FT India Short Term Income Plan
- FT India Ultra Short Bond Fund and
- FT India Income Opportunities Fund
The total funds in these schemes are around Rs.25,700 crore. These funds are invested, just like other Mutual Funds, in low credit rating companies at a higher rate of interest say 15% to 24% p.a. (Banks does not finance underrated companies or no rating companies). Mutual Funds finance high-risk companies with good yield in interest rates.
No takers for advances
So if lockdown continues there is a risk of default also, which yields no interest apart from huge loss. To minimise the losses now the fresh investment in the open-ended schemes are banned. People invested in mutual funds may lose a part of the investment also
These schemes may come in another name after five or six months if the financial position improves in the country.
Some other mutual funds also may close the debt schemes and continue the Equity fund schemes. These mutual fund companies know how to earn in the Bull market (shares price increase) or in the Bear market (shares price falling) as they have expertise with many professional appointed for this purpose.
So overall financial position is losing the sheen.