Why in news?
- In a bid to address concerns arising out of Franklin Templeton’s decision to wind up six debt funds, the Reserve Bank of India on 27th April 2020, decided to open a special liquidity facility for mutual funds (SLF-MFs) of ₹50,000 crore. The move is aimed at easing the liquidity pressure that mutual funds face.
- The liquidity facility provided by the RBI is a good confidence-building measure for mutual fund investors and will help in the normal functioning of the market.
Why was this necessary?
- Heightened volatility in capital markets in reaction to COVID-19 has imposed liquidity strains on mutual funds.
- The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid.
- The decision by Franklin Templeton to voluntarily wind up six of their debt funds has shaken up the debt mutual fund industry.
Read More about the Franklin Templeton move at: https://www.legacyias.com/centre-should-act-now-on-franklin-templeton-issue/
Details of RBI’s Move
- The RBI has opened the SLF-MFs in the backdrop of Franklin Templeton Mutual Fund deciding to close six debt schemes, citing lack of liquidity in the debt market and unprecedented redemptions in these yield-oriented schemes.
- Under the SLF-MF, the RBI will conduct repo operations of 90-day tenor at the fixed repo rate. The SLF-MF is on tap and open-ended, and banks can submit their bids to avail themselves of funding on any day.
- The special repo window will be available to all LAF (liquidity adjustment facility) eligible banks against eligible collateral and can be availed of only for on-lending to mutual funds (MFs).
- The central bank has stated that it remains vigilant and will take whatever steps are necessary to mitigate the economic impact of Covid-19 and preserve financial stability.
What are Mutual Funds?
- A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.
- Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors.
- A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
- Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities.
![How Mutual Funds Work Returns Security](https://cdn.statically.io/img/www.legacyias.com/wp-content/uploads/2020/04/image-216.png?quality=100)
Types of Mutual Funds
The Securities and Exchange Board of India (SEBI) has categorised mutual fund in India under four broad categories:
- Equity Mutual fund scheme: These schemes invest directly in stocks. These schemes can give superior returns but can be risky in the short-term as their fortunes depend on how the stock market performs. Investors should look for a longer investment horizon of at least five to 10 years to invest in these schemes. There are 10 different types of equity schemes.
- Debt Mutual fund schemes: These schemes invest in debt securities. Investors should opt for debt schemes to achieve their short-term goals that are below five years. These schemes are safer than equity schemes and provide modest returns. There are 16 sub-categories under the debt mutual fund category.
- Hybrid Mutual fund Schemes: These schemes invest in a mix of equity and debt, and an investor must pick a scheme based on his risk appetite. Based on their allocation and investing style, hybrid schemes are categorised into six types.
- Solution-Oriented Schemes: These schemes are devised for particular solutions or goals like retirement and child’s education. These schemes have a mandatory lock-in period of five years.