The Reserve Bank of India (RBI) announced a financial support package on April 27 (Monday) for mutual funds amid liquidity concerns after Franklin Templeton Investments wound up six of it’s debt funds and barred all redemptions.

The package, also known as Special Liquidity Facility- Mutual Funds (SLF-MF), seeks to provide the mutual fund industry with Rs 50,000 crore to ease the liquidity pressure in the industry.

The RBI does specify that SLF-MF is available only for high-risk funds as the “larger industry remains liquid”. The RBI “remains vigilant and will take whatever steps are necessary to mitigate the economic impact of COVID-19 and preserve financial stability”, said the central bank in a press release this morning. 

This comes a few days after Franklin Templeton, a Mumbai-based asset managed company marked down six of its debt funds.

Also Read : Franklin India: Shuts Down 6 Credit Risk Funds

These funds have been wiped off from the market, holders of these funds cannot redeem their money and the fund has discontinued it has ceased to generate any returns. In such times when panic has seized our domestic investors, RBI’s relief package does seem to pacify such concerns, to some extent if not all.

Let’s understand in detail what SLF-MF conveys and what it means for you.

What are the Details of SLF-MF?

Simply said, the funding announced by the RBI will first move to banks and then to mutual funds. Banks will be bidding for their share of the Rs 50,000 crore through repo operations. Banks have time from today till May 11, 2020 to apply for this facility; either May 11 or till the utilization of the full amount, whichever comes earlier.

Now these funds can be used by banks, as stated by RBI in three forms

1. Banks can extend loans to mutual fund houses.

2. The funds can be used by banks to purchase the collateral against the “investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs)” held by these mutual funds.

3. The banks can also undertake repos against the collateral of the above-mentioned products. Repos are basically short term borrowing operations. 

These are the ways the banks can give out their funds to mutual funds.  Banks have been specifically asked to take the collateral against ‘investment grade’ funds only which means they are being advised against taking too much risk in lending to mutual funds.

What Does it Mean for You?

On a larger note, this move by RBI has helped to infuse certain positive sentiments.  many investors had already started redeeming or were contemplating to do so, seeing the larger debt market in risk. This will help improve the sentiments of investors about the debt funds market in general.

We could already see the impact on the market sentiment today (27th April). Both Nifty and Sensex ended 1.3-1.4% higher, albeit, off their day’s high. Nifty bank ended 2.52% higher today, becoming the top gainer among all NSE sectoral indices.

On a more direct note, this liquidity package will help houses finance redemptions. Had there been no financial relief, AMCs would have to sell their existing papers at a discount and compromise on the NAVs (net asset value). This move will also allow funds to borrow money from banks at a lower cost under SLF-MF than the rates offered by banks otherwise.

As a result of well-financed redemptions by the AMCs and no panic redemptions by the investors will prevent any undue volatility that would have happened in the yields of the debt funds and the market in general. 

Final Thoughts

RBI’s move has come in at the right time which will prevent mishappenings that have happened before in the country. Remember the IL&FS crisis and the panic redemptions that continued thereafter?

This might prevent similar panic redemptions to some extent by spurring positive investor sentiment. Rest assured, RBI has ensured that in the wake of COVID-19 and redemption pressures stemming from the closure of certain debt funds, the central bank will be on the constant beck and call to ensure the economy and investor sentiment is on track.