Rupakumar Pradhan, CFPCM, CWM®

Personal Financial Advisor

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Will Special Liquidity Facility help Franklin Templeton AMC?

Will Special Liquidity Facility help Franklin Templeton AMC?

Will Special Liquidity Facility help Franklin Templeton AMC?
April 28
18:26 2020

In order to boost investor confidence, the Reserve Bank of India (RBI) on 27th April 2020 (Monday) announced a Special Liquidity Facility-Mutual Funds (SLF-MF) of Rs 50,000 crore to ease liquidity pressures on mutual funds which have gathered as a result of heightened volatility in capital markets due to the Covid-19 pandemic and franklin Templeton Fund House’s wind up decision of six fund debt funds.

RBI said in the press release “Heightened volatility in capital markets in reaction to COVID-19 has imposed liquidity strains on mutual funds (MFs), which have intensified in the wake of redemption pressures related to closure of some debt MFs and potential contagious effects therefrom. The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid.”

How will SLF-MF work?

The RBI announced Rs. 50,000 crore Special Liquidity Facility for Mutual Funds (SLF-MF). What does it mean? This means that if an any Asset Management Company (AMC) or Mutual Fund Company is receiving pressure of excessive redemptions and do not desire to (or cannot) sell portfolio securities/bonds in the market, then they can approach the bank to avail a loan under SLF-MF scheme.  The bank would first get the funds at a special (lower) rate from RBI between April 27, 2020, till May 11, 2020, or until exhaustion of the funds. Then they would offer it as a loan to interested mutual fund companies.

AMCs will have to offers as collateral investment-grade corporate bonds, commercial papers, debentures or certificates of Deposit they are currently holding. According to SEBI Rules, each fund can borrow up to 20% of AUM for 6 months. There is no relaxation on  this limit.

As per RBI, Funds availed under the SLF-MF shall be used by banks exclusively for meeting the liquidity requirements of MFs by (1) extending loans, and (2) undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs.

While AMCs would have a usual borrowing agreement with banks, they could now borrow at a lower rate under SLF-MF.

Will SLF-MF help Franklin AMC?

Since Franklin Templeton Fund House has already closed six debt mutual funds on 24th April 2020, they do not want this loan facility (SLF-MF) for those closed schemes. Since they have partially written down fund of funds investing in the closed schemes, they may utilize it for redemptions from those or other open schemes.

If FT wants to use SLF-MF for the payout from the closed-schemes, the banks may either not take the low-rated bonds as collateral or charge a higher rate.

Will Franklin Templeton lose anything?

Just imagine the other part of the story, Rs 30,000 crore of debt assets (all six funds) for FT Fund House translates to approximately Rs 300 crore of revenue loss per year as per fund management and other fees. Yes, Revenue Loss. Then it is very difficult to calculate the other losses i.e. Reputation, Brand Image, Tarnishing a 25 year-track record etc. For an Asset Management Company (AMC) to take such a stance must not have been so easy. FT focuses on preserve value for unit holders during this Covid-19 pandemic.

As per the FT Closure Notice, “The Trustees of Franklin Templeton Mutual Fund in India, after careful analysis and review of the recommendations submitted by Franklin Templeton Asset Management (India) Private Limited (the AMC), and in close consultation with the investment team, are of the considered opinion that an event has occurred, which requires these schemes to be wound up and that this is the only viable option to preserve value for unit holders and to enable an orderly and equitable exit for all investors in these unprecedented circumstances.”

In this current situation or without any communication from FT Fund House, It is suggested that all the investors affected by the scheme closure not to assume that SLF-MF would help them.

Plan Well To Live Well!

“It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” ~Charlie Munger

I am a CERTIFIED FINANCIAL PLANNERCM, CHARTERED WEALTH MANAGER®. For the moment, I have shared my experience growing up with you because it had a tremendous impact on how I do what I do.

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Franklin Templeton To Wind Up 6 Debt Funds- What should I do?  Read it

About Author

Rupakumar

Rupakumar

Mr. Pradhan has over 22 years of experience in financial services industry. He was previously working with leading Life Insurance Companies, Broking Firms, Distribution Company, Financial Planning Company and Health Insurance Company. He has cleared several NCFM modules & is also AMFI Certified. His expertise is in Comprehensive Financial Planning, Technical Analysis, Portfolio Management, Investment Advisory, Wealth Management & Business Development.

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