How Franklin Templeton India debt fund crisis affect investors

There is an increased concern over higher redemption from the debt funds post Franklin Templeton India’s unprecedented move to close six of its debt MF schemes. The move by the fund house was on the back of increased redemption and tight liquidity in the debt market. So, does it mean that debt funds are unsafe?

First of all, investors should understand that debt funds are not risk-free. Just like equity funds, there are different categories of debt funds that carry different risks and are meant for investors with the varied risk profile. Risk spectrum in debt funds varies from funds investing in money market instruments with the lowest risk to investment in credit risk fund that carries higher risk.

If we look at the monthly inflows and outflows number released by Association of Mutual Funds in India (AMFI), net outflow from ‘credit risk’ fund is not exceptionally high compared to other categories of debt funds. For the month of March, the ‘credit risk fund’ saw a net outflow of Rs 5,568 crore, which is less than 10 per cent of its asset under management (AUM). If compared to the overall outflow of Rs 1.95 lakh crore from the entire debt funds, it will be 23.3 per cent of the total debt MF AUM.  

Moreover, credit risk funds constitute only five per cent of the overall mutual fund debt AUM. Further, analysis of the portfolio of the debt funds shows that mutual fund debt investments in the troubled sector such as NBFCs and housing finance companies have a strong parentage and hence, lower chance of default. Besides, the overall exposure of the debt funds in companies facing funding risk is less than five per cent. Therefore, we do not see further downside risks to mutual fund exposure to the troubled sector or company is limited.

What should debt investors now do?

The pandemic has created a lot of volatility in both equity and debt market.  Franklin Templeton’s woes threaten to accelerate those outflows. Investors in the current situation should avoid panic selling as it seems to be a one-off case representing a small portion of MF debt AUM. Highly conservative investors could park their monies in overnight funds or gilt funds.