The fund was first envisioned in the Union Budget of 2022. It was considered necessary after the winding-up of six debt mutual funds by Franklin Templeton in April 2020. The event saw mass panic as investors rushed to redeem their investments in the funds, forcing the fund house to halt redemptions as the prices of debt securities held by them plummeted.
The new fund will be managed by SBI Mutual Fund. It will ensure that funds are made available to participating mutual funds in the event of a liquidity crisis.
“What we have seen in the past, in 2008 and thereafter when this Franklin Templeton issue came in, is that whenever there is a credit issue in the market, the whole industry base gets into a panic,” said DP Singh, deputy managing director at SBI MF, in an interview with BQ Prime.
“To have a risk mitigation against such eventualities in the future, this facility has been brought in. Whenever there is such an event, this fund has been created (for it). The fund will buy the security at the market price and provide them liquidity,” he said.
The fund received approval from the Securities and Exchange Board of India in March of this year. The contribution by mutual fund players is close to Rs 3,300 crore, said A Balasubramanian, managing director and chief executive officer of Aditya Birla Sun Life AMC and chairman of industry body Association of Mutual Funds in India, in an interview with BQ Prime.
“Those that are running fixed income schemes will contribute a portion of the scheme. In addition, each AMC will contribute to the capital from their balance sheets,” he said.
Besides this, the National Credit Guarantee Trustee Co., a wholly-owned subsidiary of the Department of Financial Services of the Government of India, will provide a credit line guarantee of Rs 30,000 crore. This is being given in the form of a standing facility, which will initially be for a period of 15 years.
In the event of a crisis, the market regulator will signal the backstop facility to kick into action, and funds will be provided to mutual funds on a first-come, first-served basis, Singh said.
