Debt debacle

The sudden suspension of six debt funds by a major mutual fund house has led to nervousness among the investors who found out on Friday that the fund had blocked their redemptions and other exit routes. At stake are investments worth Rs 26,000 crore, and more than that, the confidence of investors. Indeed, if initial actions are any indication, the withdrawal of investors from the fund’s other debt schemes could well be a contagion which could spread, unless it is swiftly contained.

Advertisement

Franklin Templeton has tried to reassure its investors that the money invested in the six funds would be returned to them, but only when the papers it holds mature. While the fund house blames illiquidity, the quality of the assets is being questioned too. Since the fund holds substantial below-AAA-rated papers in the corporate bond market, there are few takers for them at this time. Concerned about the impact of the fund house’s decision, the Association of Mutual Funds in India (AMFI) has given assurances about the quality of other schemes and stressed that the assets under management of these six schemes constitute less than 1.4 per cent of the industry’s aggregate. The RBI, too, has assured that liquidity would be available.

The Securities and Exchange Board of India (SEBI) and the government need to step in swiftly with measures that protect the investors. Redemptions need liquidity, and this is where the RBI assurances and SEBI regulations that allow mutual funds to borrow against their assets to meet liquidity come in. It would be necessary to ensure that this borrowing does not come at an excessive rate since that would have further negative consequences. Projecting confidence is fine, but concrete steps must be taken to ensure that the investors retain confidence. Every investor understands the nature of the market. However, there is an expectation that investors would be able to redeem their money at any given point. When this option is taken away, there is apprehension, even fear. Coupled with the present economic scenario, things can take a worrying turn, and thus there is a need for clear directions from the government and quick, effective intervention by the agencies concerned.