Coronavirus impact: Many debt schemes turn cash negative in March

Net liabilities rise 3-17%, funds forced to borrow to meet redemption pressure

Debt mutual funds, driven by lack of liquidity in March, borrowed heavily to meet redemptions. As a result, several schemes reported net liabilities of 3-17 per cent of scheme assets at the close of the month.
 

“As permitted by the Securities and Exchange Board of India (Sebi), all mutual funds are allowed to temporarily borrow to meet redemptions, by pledging securities or even through bank lines. This time around, the markets were exceptionally tumultuous at the end of financial year 2020 with the outbreak of Covid-19,” Franklin Templeton MF said in a social media post to explain the borrowing.
 

The fund house has seen 7-17 per cent net liabilities as of March 31, 2020, according to its disclosures.  The Franklin Templeton Short Term Income Fund had Rs 1,255 crore (17.7 per cent of scheme assets) as negative cash balance as of March 31, 2020.
 

The Franklin Low Duration Fund had Rs 347 crore (12.7 per cent of scheme assets), while the Franklin Ultra Short Bond Fund had Rs 783 crore (7.1 per cent of scheme assets).

According to Sebi regulations, schemes are allowed borrowing of up to 20 per cent of scheme assets to meet redemptions.

Industry sources say that instead of selling securities in the liquidity-crunched market and taking a hit on mark-to-market valuations, debt fund managers have decided to borrow from lenders.
 

According to industry participants, borrowing was on the higher side in March because redemption had spiralled and liquidity in debt markets had declined significantly amid disruptions created by the lockdown.

The mutual fund (MF) industry saw the highest ever outflow in debt schemes in 2019-20. 

A combination of hardening yields amid selling by foreign institutional investors and redemption pressure from corporate treasuries seeking to conserve cash in view of the lockdown led to Rs 1.94 trillion exiting in March.

Other schemes that saw a negative cash balance included the Birla Sun Life Money Manager Fund, which had Rs 1,101 crore of net payables (13.2 per cent of scheme assets) as of March 31, 2020. ICICI Prudential Money Market Fund had Rs 1,312 core of negative asset position (23.75 per cent of scheme assets) as of March 31, 2020. In response, ICICI MF spokesperson said, “Any negative net asset position in factsheet maybe on account of subscriptions or switch transaction received pending unit creation and not necessarily borrowing outstanding as on that date. In April mid-month, we have positive asset position of 4.1 per cent.”   

The Kotak Savings Fund had Rs 683 crore (7.5 per cent of scheme assets) and the Birla Sun Life Low Duration Rs 565 crore (Rs 6.4 per cent of scheme assets).

“Our net borrowing in the Kotak Corporate Bond Fund is Rs 50 crore and in the Kotak Savings Fund it is Rs 720 crore. We decided to borrow because we estimate yields coming down and better price realisation. This way we won’t need to sell on an urgent basis,” said Nilesh Shah, managing director, Kotak MF.
 

“Our endeavour is to reduce borrowing by liquidating our portfolio in the near term at reasonable yields rather than at desperate yields,” he added.
 

Among liquid schemes, the L&T Liquid Fund (Rs 286 crore or 4.7 per cent of scheme assets) had net payables and the LIC Liquid Fund (Rs 192 crore or 3.2 per cent) also had net payables as of March 31, 2020.
 

“The payables are on account of borrowing done against redemption,” said Rahul Singh, fund manager (debt), LIC MF.