Investing in capital markets has become a challenge for most investors in the wake of the novel coronavirus outbreak. The pandemic’s economic impact has left existing mutual fund investors in the country spooked as well.
The recent closure of six debt mutual funds by global giant Franklin Templeton is a stark example of how Covid-19 has worsened India’s credit situation, with liquidity becoming a major issue at Non-banking financial companies (NBFC), who offer many mutual fund schemes.
Panicked investors are now believed to be pulling out their investments from mutual funds due to widespread negativity in markets around the globe, including India.
The widespread fear in the market, which also includes aversion from investing in mutual funds and other capital investments, has left the MF segment in deep shock.
Experts say that the six Franklin Templeton mutual funds schemes, which were closed were high-risk funds and other MF schemes do not face redemption risks. The Association of Mutual Funds of India (AMFI) assured investors that it was a one-off incident and that it will have no contagion effect on other credit-risk funds.
So, what does it mean for existing mutual fund investors and is it advisable to go for fresh investments in MFs? Here are three key points you need to know:
Strategy over panic
The recent closure of six capital debt funds of Franklin Templeton has negatively impacted sentiments of mutual fund investors. Panicked investors are now looking to pull out their money in existing mutual fund schemes.
But experts say a decision made in panic may not be accurate and that it is better to strategise at the moment. Part of the strategy involves equating credit risk and investing in safer mutual fund schemes.
However, the Templeton episode has not gone down well with mutual fund investors, who usually prefer safety over gains.
It is worth mentioning that the six high-yield debt schemes packed up by Templeton were long overdue and early signs of distress in these funds were seen as early as the IL&FS crisis in 2018. The funds also suffered due to the gradual economic slowdown and were later amplified by Yes Bank fiasco.
Since Friday, mutual fund houses in India have jumped in to reassure investors — which include corporates and individuals — that the entire debt fund market is not at risk, and urged them to stay patient and invested.
AMFI also told investors that debt schemes of most mutual funds have “superior credit quality” and “fairly liquid”. It also called it an isolated event.
Experts have also assured that there is sufficient liquidity in the system. However, they have asked investors to take a different approach to deal with challenges in a virus-affected market.
Experts have advised fundholders to assess investment portfolios and go for options that are relatively safer with little or no exposure to low-rated securities offering high yields.
RBI’s assurance
The Reserve Bank of India (RBI) has stepped in to support stressed mutual funds with a special liquidity window of Rs 50,000 crore, reassuring investors that it is actively monitoring the situation and that there is no reason to worry.
Its decision came just a couple of days after Franklin Templeton decided to wind up its six mutual fund schemes.
RBI’s instant action is an assurance that the central bank is monitoring the situation proactively and it would introduce further measures to give mutual funds adequate liquidity support.
Many experts had already recommended RBI to offer additional liquidity support to the mutual fund houses, who are facing major liquidity challenges amid the Covid-19 pandemic.
While fresh investors should maintain caution while investing in any new scheme, those already invested need to equate their portfolios and make informed choices.
Only high-risk capital debt funds, which hold low rated securities will be impacted. Therefore, checking the credit risk profile can be good practice for those who want to invest.
Trim the risk
While fund managers have assured investors to stay patient for the time, the mutual fund houses, a bulk of which are NBFCs, are currently facing major liquidity stress due to delinquencies amid the Covid-19 lockdown.
The situation in the MF space could worsen if there are more job losses or business shutdowns Asit would threaten more defaults at NBFCs.
These financial institutions will be left with little liquidity in case of big defaults in future and may be forced to delay or default on payments made to investors of debt fund schemes. Those funds which invest in low-rated high yields are at most risk, say experts.
For the time being, experts also say that debt funds with fewer risks remain viable. Corporate bonds, banking and PSU bond funds are among mutual funds that have been recommended as safe.
Simply put, investors who have a balanced, risk-free portfolio should not engage in panic selling due to increased negative in the debt market.
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