Investors, across India, have been scrambling to move their cash into the safety of bank deposits from yesterday. This change comes after the shock closure of some high-profile funds which provided high-yielding credit lines for investors.
Just last week, one of India’s most prominent mutual fund houses in fixed income, Franklin Templeton Mutual Fund, announced that it was shutting down six prominent credit funds. Now, Reports of heavy inflows into traditional deposit schemes from Indian banks, are circulating all over the press.
“Bank deposits have picked up, as a lot of money that is getting redeemed from mutual funds is also coming to banks now,” said Sumant Kathpalia, CEO of IndusInd Bank.
Countries, all around the world, are severely affected by the Coronavirus pandemic. Several of them have imposed strict lockdown measures effectively halting all non-essential economic activities. Accordingly, Templeton, in its statement, justified that the lack of liquidity in major market sectors is the principal cause behind this closure. Their combined assets of about ₹28,000 crore had a large exposure in higher-yielding, lower-rated credit securities market.
Investors are crying out for government intervention even after spontaneous measures, by Reserve Bank of India, to prop up this market sector. Industry analysts are reporting record withdrawals of mutual fund debts while traditional bank deposits are reaching a new height.
Banks have been compelled to cut down their deposit rates with this new craze, taking over. Bank deposits are swiftly growing by 9.45% year-on-year in the 2 weeks since April 10 compared to 7.93% in the 2 weeks prior . Yet, the weighted-average deposit rate of commercial banks have been down 45 basis points (100 basis point= 1%) since February 2019.
Growth of cash-flow into deposits are expected to remain in low double digits in the coming months, said an executive director at a state-run bank. This estimation comes even when up-to-date figures on this flow, after the Templeton news, will only be known next month.
In March, mutual funds investing, in debt, has seen outflows of close to ₹1.95 Lakh Crore ($25.5 billion).
Retail investors have been flocking to tax-friendly debt mutual fund schemes, for quite some time. That’s the case as companies promise that these schemes are as safe as bank deposits and with little concern for potential credit risks, in case of a default.
In 2017, credit opportunity funds, which predominantly invest in high-yielding bonds which rate below the AAA investment grade, had seen record inflows. That trend changed in 2018 as a string of defaults at a major infrastructure lender sucked liquidity out of the corporate bond market. An overall economic slowdown, in 2019, triggered more debt defaults. This had finally wound up exposing fault lines in the credit market space.
The tipping point came last month as many investors redeemed their funds to preserve cash during the nationwide lockdown and funds such as Templeton took a major hit.
Prateek Pant, co-founder of Sanctum Wealth Management, said he was facing a barrage of calls from investors worried about the safety of their debt investments.
“Overall, debt funds as a category is fine. But if you’re really losing your sleep because of that, then go ahead and put that money in a bank right now,” Mr Pant said.