Net redemptions in credit risk funds drop 81.5% in the wake of RBI aid

Net redemptions in the credit risk funds, or CRFs, a category constituting less than 5% of total assets under management with debt mutual funds, have fallen 81.5% as of April 30, according to industry body Association of Mutual Funds in India (AMFI).

The fall in redemptions has been ascribed to the announcement of the special liquidity measure of ₹50,000 crore for the mutual funds industry by the Reserve Bank of India on April 23.

Net redemptions—the remainder of redemptions minus funds mobilised—for CRFs were at ₹2,949.49 crore as on April 24, a day after Franklin Templeton, one of the largest foreign fund houses in India, announced the closure of its six credit schemes. They then peaked to ₹4,294.36 crore on April 27—the day RBI announced the liquidity facility.

Subsequently, on April 28, 29 and 30, the CRFs’ net redemptions stood at ₹1,847.29 crore, ₹1,251.17 crore and ₹793.99 crore respectively. AMFI also highlighted that all MFs have met the redemptions in the normal course of business.

In light of the severe market dislocation and illiquidity caused by the Covid-19 pandemic, Franklin Templeton Mutual Fund decided to wind up six of its credit funds on April 23. At March end, Franklin Templeton had reported average assets under management (AAUM) at ₹35,543.59 crore for the closed funds—63.39% of the fund house’s total income/debt-oriented funds’ AAUM of ₹56,107.23 crore.

At aggregate level, considering the overall AAUM of ₹99,558.59 crore, the proportion of the six closed funds worked out to 35.7%. Yet, the fund house and AMFI had tried to downplay the situation. In its release following the debacle, AMFI reassured investors that the majority of fixed income MF’ (AUM) were invested in superior credit quality securities and schemes had enough liquidity to ensure normal operations. AMFI had said that the AUM of the six closed schemes constituted less than 1.4% of the Indian MF industry’s aggregate AUM as on March 31.

Four days after the closure of the funds came the RBI’s special liquidity facility for MFs. “Heightened volatility in capital markets in reaction to Covid-19 has imposed liquidity strains on mutual funds, which have intensified in the wake of redemption pressures related to closure of some debt MFs and potential contagious effects therefrom,” the RBI said in a release announcing the measure.

“The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid,” RBI had added.

AMFI’s chairman and Kotak Mahindra Asset Management Co.’s managing director Nilesh Shah said the declining trend in net redemptions from CRFs is a welcome development, which is “indicative of investors’ comfort from RBI's special liquidity facility available to the MF industry”.

On an immediate basis, the numbers seem to indicate that the Covid-19-induced storm has abated for the debt segment of Indian MF industry. But it is yet too early to say if the storm has passed.

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