Will Rs 50000 crore liquidity window save Indian mutual fund investors?

Reserve Bank of India (RBI) on 27 April 2020 announced special liquidity facility of Rs 50000 crore for mutual funds. The announcement is aimed at providing liquidity to the mutual funds which are stuck with low rated bonds. On 23 April 2020, Franklin Templeton Asset Management Company Limited announced plan to wide up its six bond fund schemes, which were heavily invested in low rated bonds.

This is not the first time that the RBI has announced such a move. In the past couple of months twice such announcements were made to infuse liquidity worth Rs 1 lakh crore. A point to note that on 17 April 2020 the RBI offered a focused line of credit to purchase the bonds issued by non-banking finance companies and micro-finance institutions. However, things did not change much.

The money offered by the RBI can be used by the banks to purchase investment grade bonds held by mutual funds. Earlier also the money offered by RBI was meant for the same purpose. If the things did not change then, there is little change that can be expected after today’s announcement. Today’s announcement is more of a confidence boosting measure.

So what should investors expect going forward?

Credit risk funds (or any fund with investments in low rated bonds) will continue under pressure
Credit risk funds are not bad; but their ability to honour redemptions will be tested
Risk averse investors will be better off with overnight funds and corporate bond funds
Selectively some money (around 20% of the fixed income portfolio) can be invested in select credit risk funds given high yields, provided one can hold for three to five years (Serious money can be made here)