Home >Opinion >Columns >Opinion | Liquidity window will help boost confidence

The closure of six debt schemes by a fund house had increased worries that investors might rush to redeem and heighten redemption pressures. So, the Reserve Bank of India’s (RBI’s) 50,000-crore special liquidity facility for mutual funds comes as a massive confidence booster. It ensures that we have a backstop facility, if required, to meet redemption pressures caused by covid-19. Having said that, there is ample liquidity for debt funds, but RBI’s liquidity facility will ensure that there is a refinancing window available. We are thankful to RBI and the Securities and Exchange Board of India (Sebi), which worked over the weekend, to announce these confidence-building measures.

The effects were limited to one fund house, but the panic could have spread to other fund houses and that’s why the captains of industry came together to assure investors and prevent any panic redemptions.

We appreciate and understand the concerns of investors and stakeholders since 23 April after the six income-oriented debt funds were closed. Income-oriented debt schemes of most mutual funds have superior credit quality as confirmed by ratings of independent credit rating agencies and continue to remain fairly liquid even in these challenging times. Even the credit risk funds are well diversified and made up of AAA-rated paper, T-bills, G-Secs, cash and some lower-rated papers. Liquidity, maturity profile and credit quality of debt funds is appropriate for day-to-day operations to continue uninterruptedly.

Even now the industry has been fairly well equipped on managing the redemption stress by either realisation of funds on maturity of paper or, if required, by borrowing from banks. Sebi regulations allow mutual funds schemes to borrow up to 20% of their assets to meet liquidity needs for redemptions and dividend pay-outs. However, as on 23 April, out of the 42 mutual funds only four had borrowings aggregating to 4,427.68 crore. The borrowing at the industry level is minimal and does not raise any liquidity concern. Besides, the banking liquidity in excess of 7 trillion, long-term repo operations conducted by RBI, expectations of further rate cuts and Operation Twist have kept the bond market liquid. At some point, the measures by RBI will move the credit curve to even lower-rated paper. The mutual fund industry has seen many cycles of highs and lows. Through it all professional fixed-income fund managers have managed crises efficiently. The industry remains robust like during the 2008 sub-prime crisis or the 2013 taper tantrum crisis.

In the current scenario, where interest rates are falling and traditional avenues of savings are generating inflation-beating returns, mutual funds help generate better risk-adjusted returns as they invest in a variety of instruments. Investors who do not have the wherewithal to invest in direct equity, can use the mutual fund route with just 500 a month.

The Association of Mutual Funds in India (Amfi) continues to recommend that investors focus on investment goals, consult their financial advisors and not get sidetracked by an isolated event. The mutual fund industry remains committed to investor interests and there is no need for them to panic and redeem their investments.

N.S. Venkatesh is chief executive officer, Amfi.

Views expressed are personal.

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