Post announcement of abrupt closure/putting redemption on hold indefinitely of 6 debt MF schemes by a reputed fund house, RBI opened a liquidity window amounting to Rs 50,000 crore exclusively for Mutual Funds through banking channel. Funds borrowed under the scheme, that is open till May 11, 2020, can be used by banks exclusively for meeting liquidity requirements of MFs by granting loans and/or outright re-purchase of securities by taking investment grade collateral of corporate bonds, commercial paper, debentures and certificates of deposits held by MFs.
Purpose of Providing Liquidity
Under the mechanism, RBI would offer funds to the Banks against Government Securities, which, in turn, would lend it to MFs exclusively against collateral of investment grade liquid securities. With infusion of adequate liquidity, there would not be steep hike in yield spreads those rose just by 5-10 basis points. The infusion of the liquidity to Mutual Funds has taken place third time since global financial crisis in 2008. The second instance happened in 2013 when taper tantrum (collective reactionary panic triggering spike in US treasury yields when investor came to know US was gradually withdrawing its quantitative easing (QE) program) phenomenon took place.
Closure of Debt Schemes
In a shocking move, a renowned fund house closed down 6 of its debt MF schemes, with AUM of almost Rs 27k crore. Those considering debt fund investments as source of safe and steady returns were under mistaken notion, presuming that principal would never be at risk. These 6 debt schemes were open ended where corpus was invested in lower grade and il-liquid debt papers with the aim of generating better returns than peers. Fund Manager, managing these schemes, had adopted a differentiated strategy that was generating better returns worked well for the fund house, initially, in the absence of competition. Financial crisis period of 2008 was escaped as corpus under management was much lower and the quality of debt paper was better. With the exponential growth in the assets under management, quality of paper also took a hit. Most of the credit risk exposure was on highly indebted groups or stressed promoters. Liquidity risk was completely ignored in the process.
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