Mutual Fund houses at Risk

After a shocking episode with regards to Franklin Templeton liquidating 6 of their schemes and about a devastating 30% drop in the market, has compelled us all to think about a simple question, what next?

My understanding of Franklin templeton wound-up story is simple. This did happen because of 2 reason

1.      Credit Risk : Redemption pressure for these debt funds did happen because of their exposure to high yielding bonds with huge default risk. During uncertain times investors look for safe heavens like government bonds, rather than lower rated bonds which are uncertain to keep making payments of interest and also return the principal.

Simply said: Risk of bond goes up, interest goes up too.

2.       Liquidity Risk : The MFI begins to find a cash flow mismatch and wants to borrow working capital or longer-term money to keep operations going. Bank have allowed these fund houses to borrow 20% of their AUM in uncertain times, but even these are getting used up quickly. Also there aren’t enough liquidity going around in the bond market, results in forceful sell offs of these bonds at losses, while there aren’t enough buyers.

*This is a simple analysis in which I took funds which are similar to those wound-up by Templeton as my sample size (all above 1000 crore) , *exposure to A and below (along with unrated) assumes to signify risky exposures, *cash signifies their ability to handle redemption pressure. Funds at risk shall be sell off risk of bonds when you have redemption pressure. If I just take top 10 credit risk in the list tells me Rs 50000 crore of AUM shall be at stake in near times.

Values are taken from Value research.