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Franklin Templeton Mutual Fund Impact


For Franklin Templeton Investors in winded up Credit Funds 
Franklin Templeton has a total of 1.16 lakh crores of AUM in various mutual fund schemes in India, out of which Rs 55,000 crores correspond to credit fund. The problem lies with this company because the majority of high exposure are non-AAA rated securities. Six credit funds which they have winded up includes Rs 30,000 crores of AUM. Investors who have invested in such securities might face low or negative yield as only 26% of these securities are maturing in next year, and owing to the current scenario, the market price of these securities can go low due to high risk of default.

For Mutual Fund Market as a whole
In the last few years, total AUM under equity mutual fund schemes was on an increasing spree, while credit funds were already on the decline before the start of the Covid-19 pandemic as well. The secondary market for the bond is too not developed. This crisis only exacerbated the problem.
The total Credit profile of the entire Fixed Income portfolio with mutual fund houses is about Rs. 13 lac crores. Out of this, 83% (10.8 lac Crore) is AAA-rated, sovereign, or cash, which can quickly be sold to other investors if the demand for liquidation increases by mutual fund investors. Rest securities of 2.2 lac Crores might create a problem. Not all of these would default, but in the current scenario, investors might not be interested in buying them. It may too happen that some AAA-rated securities get downgraded and don't find enough interest among investors. Hence this can create a problem of liquidity.
Since the repo rate is on the decline and high amount of credit available with banks, the yield on these maturities will go low. Investors might hesitate to put their money in the bond market and will like to put their money out of such instruments.
RBI can help bond market. As many companies are facing cash flow problems, and this seems to continue shortly because of restricted access to labor and low demand, the demand for these bonds will remain low. Secondly, India's bond market is not developed too, and this will lead to a broader spread of margin.
 RBI has allocated loans of about Rs 50,000 crores for such mutual fund houses. However, mutual fund houses need to put their securities with the bank, in order to get that loan. Those AMC which used to invest in lower-rated bonds will find it harder to get the loan as they won't have many investment-grade securities left to put up with Bank. To other AMC, availability of loan was not the concern as enough credit is available with bank. Though investors might feel a ray of hope and that can turn the tables.

One other way by which RBI can help in such a scenario is by buying bonds above a particular credit quality for the time being and later selling it in the secondary market, thereby boosting the bond market as well.

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