Backstop facility for debt mutual funds in stress to boost investors' confidence: How it works

economictimes.indiatimes.com:

Sebi has launched a backstop facility for debt funds to help them tide over a liquidity crunch in times of market dislocation. Here’s all that you need to know about the fund.Why is there a need for a rescue fund? Remember the Franklin Templeton mutual fund debt fund fiasco of 2020? Six of its debt schemes had to be wound down after a severe market dislocation dried up liquidity in their underlying holdings. This prevented the fund house from meeting a wave of redemptions without undertaking a fire sale.

The problems across debt funds had first surfaced after the IL&FS default in 2018. Sebi’s super fund, the Corporate Debt Market Development Fund (CDMDF), will act as a last resort buyer in such situations. It will buy illiquid securities from the affected funds in a market dislocation, providing them with liquidity.

This is to shore up the confidence of investors and prevent panic.Who is paying for this? The participating debt schemes and AMCs will pay to avail of this facility. All debt schemes, barring overnight and gilt funds, will contribute 0.25% (25 basis points) of their assets under management to this fund, apart from a onetime contribution of 2 bps of the fund AUM. Every six months, the debt funds will make incremental contributions if there is a rise in scheme AUM.

Against these contributions, the participating AMCs and debt funds will get units in the super fund. The AMC making the contributions can’t take its money back if any of its debt scheme’s AUM falls. Additionally, the participating funds will bear the fees and expenses of the fund—0.15% of the portfolio value during normal times, and 0.20% of the portfolio value in times of market stress.How does it work? In normal circumstances, the CDMDF will invest