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MFs turn conservative on investment mobilisation, go on a cleanup spree

SEBI had allowed mutual funds to grandfather existing investments in unlisted debt instruments till their maturity, so as to not disrupt the market.

May 24, 2020 / 12:37 PM IST

With the Securities and Exchange Board of India (SEBI) cracking a whip on fund houses in the last few months, mutual fund managers have become cautious on inflows and investments.

On April 23, Franklin Templeton Mutual Fund said it would wind up six schemes — Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund — citing severe illiquidity and redemption pressures caused by the novel coronavirus pandemic's impact.

The total AUM of these six schemes stood at Rs 25,856 crore.

As Franklin Templeton Mutual Fund had majority of their funds invested in instruments rated AA or lower, the fund had no option but to close these schemes after it witnessed redemption of over Rs 4,000 crore in less than a month.

On May 7, SEBI asked Franklin Templeton MF to focus on returning the money stuck in these funds to investors as soon as possible.

SEBI had allowed mutual funds to grandfather the existing investments in unlisted debt instruments till maturity of such instruments, so as to not disrupt the market.

Similarly, Aditya Birla Sun Life Mutual Fund has stopped new money inflow called subscription, in two schemes — Aditya Birla Sun Life Medium Term Plan (ABMTP) and Aditya Birla Sun Life Credit Risk Fund (ACRF). The fund house suspended new investments in these schemes from May 22, 2020.

Generally, a fund house prefers to stop fresh inflows when there is a perceived dearth of investment opportunities. Instead, it may choose to sit on the cash till the market opens up for sound investments.

Further, fund manager may not always be in a position to wait and avoid investing altogether. In such cases, restricting inflows in the scheme is the only way out.

Both these schemes of Aditya Birla Sun Life MF had exposure to debt securities of IL&FS companies, which were written down, and also of Essel Group, which were recovered.

The AMC had stated that it has taken this step to protect the interests of investors. “We believe that there are substantial gains in our funds, which would be realised by the existing investors over the next few months. Since we do not wish to dilute this for existing investors by taking more money in these funds, we have stopped fresh subscriptions,” said A Balasubramanian, Managing Director & Chief Executive Officer, Aditya Birla Sun Life AMC.

According to MF experts, Aditya Birla Sun Life was finding less quality debt papers that suit the investment objective of these two schemes.

Aditya Birla Sun Life MF was the most-affected fund house when the debt fund crisis surfaced in September 2018 with IL&FS default as the mutual fund house had exposure in debt securities of troubled firm. Among others in September 2018, Principal Mutual Fund too had suspended all subscriptions under Principal Cash Management Fund, Principal Ultra Short Term Fund, Principal Low Duration Fund and Principal Arbitrage Fund.

In the backdrop of asset separation of non-paid debt papers of IL&FS, Essel Group, DHFL during 2018 and 2019, MFs want to invest new money only in best quality papers or debt securities.


SEBI allowed mutual funds to segregate or side-pocket assets of investments or securities that default or in some case the money can be expected money at a later date. However, segregation of bad overdue assets from regular schemes, causes multiple issues.

The first disadvantage of segregation is that net asset value (NAV) of the scheme declines by the amount that is segregated and second, the segregated bad assets present an accounting hangover that if the due payment is received, then remaining NAV has to be returned to the investors.

Marking down value of beleaguered securities led to a drop in NAV of some schemes. NAVs of certain schemes had declined as much as 80 percent.

A mutual fund deciding to halt from taking fresh money into certain schemes due to market conditions, is entirely a mutual funds perspective, according to an ex-SEBI officer who worked in its mutual fund department.

SEBI may intervene with necessary supervision to oversee that exiting investors and remaining investors are treated fairly and equally in a schemes that fund houses are winding up, he added.

Echoing similar view, a chief investment officer added: “It is high time mutual funds cleanup portfolios. One should research a company well before investments. It will bring down defaults in the portfolio.”

Himadri Buch
first published: May 24, 2020 12:37 pm

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