Indian office workers wait at a bus stop in Mumbai in front of an advertisement promoting mutual funds. Photo: AFP

The economic disruption brought about by the Covid-19 lockdown has been roiling the Indian stock market since March, but now the contagion seems to have spread to mutual funds – a favorite of risk-averse investors. The country has been under lockdown for nearly a month and it is expected to continue until at least May 3.

In a surprise move, Franklin Templeton Mutual Fund has decided to wind up six debt schemes with a combined asset base of 258.56 billion rupees (US$ 3.4 billion). The Indian arm of the US fund group announced that it was due to redemption pressure and a lack of liquidity in debt markets. The total asset under management of Franklin Templeton in India is 1.04 trillion rupees ($ 13.62 billion) as of March 2020.

Franklin Templeton officials said they were finding it difficult to generate liquidity in the current market scenario and that continuing to operate the funds would negatively impact existing investors. The six yield-oriented schemes in which investments have been stopped include the Franklin India Low Duration Fund, Dynamic Accrual Fund, Credit Risk Fund, Short Term Income Plan, Ultra Short Bond Fund and Income Opportunities Fund.

The funds invest in lower-rated bonds offering high interest rates. Investors will no longer be allowed to make fresh purchases or sales from these funds. The fund house is expected to make payouts to investors in a staggered manner.

Franklin Templeton has been popular with retail investors, particularly senior citizens, as it has generated high yields. It has been in India for 25 years and nearly 33% of its global workforce is based in the country.

This development is expected to create a stir in the debt market and market experts fear many investors will get nervous and redeem their funds. This is expected to put pressure on the debt market.

The industry body Association of Mutual Funds in India has rushed to allay investor concerns regarding debt funds floated by other mutual fund houses. This March the redemption pressure on debt mutual funds was the highest (1.94 trillion rupees or $25.4 billion) for the closing month of any financial year.

Market research firm Capitaline said earlier that retail investors in the Indian stock markets have lost about 3 trillion rupees (US$39.5 billion) in the past three months. In its report it had stated that at the end of December 31, 2019, retail investors – those who have invested up to 200,000 rupees in an individual capacity – held 9.84 trillion rupees ($129 billion) worth of investments as stocks. The value had shrunk to 6.87 trillion ($90.3 billion) as of April 3.