Regulators urged to consult industry
Asset management companies should revisit their investment strategies and stress testing policies to ensure that it is equipped to meet with any future contingencies that may arise due illiquidity in the market and/or increased redemption pressures.
This suggestion was made by Nishith Desai Associates’ (NDA) legal experts Sanjana Rao, Prashant Prakhar and Pratibha Jain following the experience of Franklin Templeton experience in India and the COVID-19 impact on global economies.
At the same time, the trio followed up with a call on financial regulators to ensure that their policy announcements are done in consultation with the industry as a whole, keeping in mind the importance of certainty in business operations and importance of investor confidence.
Further, the investors should also not lose confidence in the mutual fund market simply because one asset management company could not keep up with the redemption pressure, said the NDA experts.
The investors should continue to focus on their investment goals and to the extent possible avoid any premature mass redemptions, they wrote in an article “Are Mutual Funds too big to fail – Not really!” released by Nishith Desai on 20 May 2020.
What was once considered to be the safest form of investment, despite turbulent market conditions, no longer appears to be the same after the recent announcement by Franklin Templeton Mutual Fund to wind up six of its yield-oriented schemes.
As per the notice released by Franklin Templeton on its website, “the primary reason which forced the decision to wind up these six schemes was the severe market dislocation caused by the COVID-19 pandemic and related lockdown which led to severe market illiquidity particularly for papers rated below AAA, combined with heightened redemptions during this period”.
However, the Association of Mutual Funds in India (AMFI) has reassured investors that yield/income-oriented debt schemes of most mutual funds have superior credit quality as confirmed by ratings of independent credit rating agencies and they continue to remain fairly liquid even in these challenging times.
Further, a set of liquidity measures announced by the Reserve Bank of India is also going to help alleviate the liquidity burden on the debt schemes of mutual funds. These measures, among others, required the funds to be availed by the banks under Targeted Long-Term Operations (TLTRO) to be invested in grade bonds, commercial paper, and non-convertible debentures of NBFCs (with at least 50% of the total amount availed going to small and mid-sized NBFCs and MFIs). fiinews.com
