The aftermath of Franklin Templeton Mutual Fund's decision to wind down six managed credit funds is being felt on the entire industry.
Franklin Templeton announced their decision late April 23 evening and as early as April 24 morning, investors big and small started redemptions across the spectrum.
According to daily assets under management (AUM) data uploaded on the Association of Mutual Funds in India (AMFI) website, mass redemptions in excess of Rs 22,054 crore have been seen in just the three working days since the FT announcement.
Of the Rs 22,054 crore of gross redemptions in the last three days, nearly half are from the category of credit risk funds followed by medium duration bond funds.
Also read: - Franklin Templeton crisis: When do investors get their money back?
It has to be understood that some of the AUM change could be on account of drop in valuations. A large drop in a scheme's NAV would suggest a change in valuation of some security. If NAV movement is marginal, then the drop in AUM would be on account of redemption pressure.
The credit risk category has come in for special punishment because of the nature of its investments.
Securities and Exchange Board of India (SEBI) mandates that a minimum of 65 percent of AUM be invested in AA and below securities. AA and below securities are considered riskier as they carry a lower probability of being able to repay their borrowings.
Kirtan Shah, a financial advisor cautions that those who do not understand risk should be wary of investing in credit risk funds. He adds that on an average, credit risk funds carry bonds or papers with two-three years maturity and therefore investors should align their investment horizon to maturity of the underlying papers.
The credit risk category has consistently seen outflows for the last one year and experts feel this trend is likely to continue.
Many experts observe that this steep fall in AUM is partly a result of the panic that investors are feeling after witnessing the unprecedented and simultaneous shutting down of six funds by FT.
Some of the redemptions could also be regular month end selling normally seen via larger investors.
However, no two funds are created equal and even today, there are schemes and AMCs which follow prudent risk management policies and have consistently delivered superior risk adjusted returns.
It is upto the investor and their advisors to sift the good from the bad.Source: CNBC-TV18