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DAILY NEWS ANALYSIS
28 April, 2020
9 Min Read
Part of: GS-III- Economy-Capital markets (PT-MAINS-PERSONALITY TEST)
The Reserve Bank of India announced a Special Liquidity Facility for Mutual Funds (SLF-MF) of 50,000 crore rupees with a view to easing liquidity pressures on Mutual Funds. The RBI 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.
Imp points
Franklin Templeton
The move comes after Franklin Templeton Mutual Fund decided to wind up six debt funds that have combined assets under management of nearly 26,000 crores on account of illiquid, low-rated instruments in their portfolio last weak.
The fund house had said it decided to wind up the schemes to preserve the value at least at the current levels, as the value was getting eroded due to a combination of redemption pressures and mark-to-market losses due to lack of liquidity on account of the coronavirus impact on the markets.
“RBI move is very timely. This move will first improve the confidence; second, it can help in providing the necessary liquidity to the mutual fund industry if anyone needs to avail of it. With the yields dropping, one would assume banks may go down the credit curve and extend facilities,” s
“Heightened volatility in capital markets in reaction to COVID-19 has imposed liquidity strains on mutual funds (MFs), which have intensified in the wake of redemption pressures related to the closure of some debt MFs and potential contagious effects therefrom. The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid,” the central bank said.
“With excess liquidity of around 4.85 trillion as on April 24, 2020, banks, however, continue to remain largely risk-averse. We expect the liquidity of the higher-rated papers to improve on the back of this facility. Accordingly, active participation from the banks will be key to the success of this scheme,”
About Mutual FUNDS and PAST news
1. The markets regulator Securities and Exchange Board of India (SEBI) has tightened norms on investments by mutual funds (MFs).
Mutual Fund: A mutual fund collects money from investors and invests the money, on their behalf, in securities (debt, equity or both). It charges a small fee for managing the money.
Liquid Funds: These are debt mutual funds that invest in securities up to a maturity of 91 days.
2. The redemption issues faced by fixed maturity plans (FMPs) of mutual funds due to their exposure towards Essel Group entities have only begun as there are nearly 80 FMP schemes with such exposure towards the corporate entity. The cumulative amount at stake is about 1,400 crores with more than 40 schemes maturing later this year. More importantly, about 14 schemes, with an exposure of nearly 475 crores (April 2019), will mature this month.
Background:
How to Invest in Mutual funds?
Equity Mutual fund scheme:
Debt Mutual fund schemes:
Hybrid Mutual fund Schemes:
Solution-Oriented Schemes:
Mutual Fund Charges:
Securities and Exchange Board of India (SEBI)
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Mutual fund redemption
Mutual fund redemption is how investors sell their fund units. However, if there is an exit load, then the investors necessarily pay it on redeeming their units. When investors redeem their units, they earn taxable capital gains. The taxability of capital gains depends on the type of fund and the period of holding. Here, investors should mandatorily consider all the expenses that they would incur on redeeming their units.
When to exit and redeem a fund
The right time to sell or redeem mutual funds depends on investors’ financial goals. One might be invested in a mutual fund for ten years to fifteen years to purchase a house or finance their child’s wedding. In some cases, it could also be a short-term goal, such as buying a car or an appliance. Once an investor gets close to realising his/her financial goal, then he/she should consider redeeming their fund units irrespective of the state of the market.
Source: TH/Web
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