The spread of COVID-19 has severely impacted the Financial Markets. Due to the COVID-19 Pandemic, there has been a significant amount of sell-off in the equity market by the Institutional Investors. While all the spotlight is on the equity market crash, there is another situation evolving in the Debt Market due to lack of liquidity.

In the month of March, several Debt Funds had to incur losses on account of a large number of redemptions. To help with the liquidity issues, the Reserve Bank of India announced LTRO and LTRO 2.0. However, the announcement was unable to win the confidence of the investors and received mixed responses.

Last week, Franklin Templeton took a harsh decision of winding up 6 credit-based Debt schemes, which meant that they would not be accepting any new transactions, be it purchase or redemption or switch in those 6 credit-based Debt schemes.

What should the next step be?

As the investments in the debt market have significantly reduced, it is our belief that other Mutual Fund houses may resort to similar measures to protect the interests of investors. It is our recommendation to safeguard your investments. We highly recommend switching all your existing investments in Debt Funds (except for Gilt Funds) into liquid funds for a short period of time.