Franklin Templeton crisis may have huge contagion, say experts

The mutual funds across the country are bracing for the outflow of funds from various schemes and spike in redemptions after Franklin Templeton Mutual Fund decided to shutter six of its high-risk debt schemes.

Industry sources say, of Rs 26,000 crore locked in for investors, about Rs 8,000 crore is the unique exposure of Franklin Templeton. The remainder is similar to at least three other fund houses, two top executives from the industry told DH.

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“There will be a rush of extremely conservative investors redeeming their short and medium-term investments which shall put supply pressure on the debt markets,” said Jimeet Modi of Samco Securities. This redemption supply, if not met with adequate demand could lead to discounting of debt valuations and further impact NAVs of existing debt funds.

Also, mutual funds used to be big investors and source of liquidity for corporates and shadow banks looking to borrow across maturities. With redemption pressure, the ability of these entities to raise debt capital shall also be impaired, according to the experts.

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As of December 2019, the total amount outstanding in corporate bonds stood at Rs 31.44 lakh crore -- 90% of which is at a fixed rate. Debt Mutual Funds -- both bond and liquid -- had assets under management (AUM) of nearly Rs 11.8 lakh crore as of March 2020, which was almost flat when compared to March 2018.

“The standalone Franklin episode could very quickly end up having a contagion impact across the entire financial markets. Realising its importance, RBI has stepped in with a Rs 50,000 crore line of credit for Mutual funds which should take some pressure off mutual funds that are facing redemption pressure,” adds Modi.

However, as banks are sceptical in lending of any kind, many mutual fund insiders believe that the RBI credit line might not prove sufficient.

“Close of Franklin’s schemes is a telling sign of the stress in the economy. While RBI's liquidity push helps, it is unlikely to change the risk investors face,” says Anubhav Srivastava of Infinity Alternatives.