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RBI OPENS RS. 50,000-CR LIQUIDITY TAP FOR MUTUAL FUNDS

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

Types of Mutual Funds

The Securities and Exchange Board of India (SEBI) has categorised mutual fund in India under four broad categories:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
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