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Redemption pressure in credit risk mutual funds persists

AUM of credit risk fund category has been falling and the category has seen continuous outflows.

April 27, 2020 / 06:51 PM IST

The special liquidity facility of Rs 50,000 crore created by the Reserve Bank of India (RBI) may have boosted confidence of mutual funds but they continue to face redemption pressure.

According to large mutual fund houses, private banks who are wealth managers to high networth individuals (HNIs) rushed to redeem their credit risk fund investments on April 27.

A Balasubramanian, CEO, Aditya Birla Sun Life Mutual Fund, confirmed that credit risk funds are witnessing redemptions. “Redemptions are only in credit risk funds, but we expect it to ease going forward,” Balasubramanian told Moneycontrol.

Concurring Balasubramanian’s view, a sales head from one of the top mutual fund houses, said, “After April 23 and 24 and particularly after the Franklin Templeton episode, the ones who had decided over the weekend to safeguard their investments have redeemed on April 27, so redemptions have continued today as well.”

Mutual funds are awaiting the total redemption number for April 27. Most fund houses expect the redemption number to be ‘reasonably higher’.


Another fund manager from a mid-sized fund house said credit risk fund investments largely come via advisors or wealth managers, so if wealth managers are advising redemption, investors are going ahead with it.

In a bid to boost sentiment, the Reserve Bank of India (RBI), on April 27, announced a special liquidity facility for mutual funds worth Rs 50,000 crore as redemptions rose after Franklin Templeton closed six debt mutual funds last week.

The RBI's liquidity infusion has provided a sigh of relief for most mutual funds, particularly the ones struggling with redemptions.

It will also instil confidence among customers, they hope, and thereby reduce liquidity pressures.

Most mutual funds are of the view that RBI’s move will instil confidence in fund houses, particularly the ones struggling with redemptions.

Credit risk funds suffer
The credit risk funds category has been suffering since the IL&FS troubles surfaced in September 2018.

Credit risk funds and few other debt categories have been facing the heat for the past year-and-a-half because quite a few companies have faced difficulty in paying regular interest to their lenders (mutual funds, banks, insurance companies and so on) and, in some cases, returning the principal too. Frequent downgrades in credit ratings took the net asset values of debt funds down.

AUM of credit risk fund category has been falling and the category has seen continuous outflows. In FY20, the AUM of the credit risk funds' category fell 30.46 percent to Rs 55,380 crore.

Franklin Templeton MF fiasco
On April 23, Franklin Templeton announced that it has shut down six of its credit strategy oriented debt mutual fund schemes. These schemes are:
- Franklin India Ultra Short Bond Fund,
- Franklin India Short Term Income Fund,
- Franklin India Credit Risk Fund,
- Franklin India Low Duration Fund,
- Franklin India Dynamic Accrual Fund and
- Franklin India Income Opportunities Fund.

Calling it an 'extremely' difficult decision, Sanjay Sapre, President, Franklin Templeton Mutual Fund-India said reduced liquidity in the bond market in March and April forced the fund house to take this drastic step.

March and April saw a significant reduction in liquidity in the bond market. The company witnessed unprecedented illiquidity for securities rated below AAA, Sapre said.

He added that schemes could not generate cash-to-fund redemptions after the lockdown was extended as it drastically reduced the market's risk appetite.

Himadri Buch
first published: Apr 27, 2020 06:51 pm
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