Hello Readers!

On 23rd April 2020, Franklin Templeton Mutual Fund comes up with a big decision regarding some of their Debt Funds. 

Franklin Templeton Trustee Services Private Limited announced that they have decided to wind up their six Debt Fund schemes of Franklin Templeton Mutual Fund under the provisions of regulation 39(2)(a) of the SEBI (Mutual Funds) Regulations, 1996 (Mutual Fund Regulations).

The funds that were wound up are as follows:

• Franklin India Low Duration Fund 

• Franklin India Ultra Short Bond Fund 

• Franklin India Short Term Income Plan 

• Franklin India Credit Risk Fund 

• Franklin India Dynamic Accrual Fund 

• Franklin India Income Opportunities Fund 

The sudden announcement by Franklin Templeton mutual fund has increased the panic and anxiety level among the investors. The investors who were investing in these funds, as well as investors of other debt funds, also are now getting more unstable towards their investment. 

WHAT DOES WIND UP OF THESE FUNDS MEAN?

After that the above mentioned six funds have been winding up, it means that now no new investment or withdrawal can be done by the investors of these funds. The mutual fund company will do an orderly sale of their investments and return the money to investors. However, the time for this sale has not been announced yet by the mutual fund company. 

As per the Franklin Templeton Mutual Fund:

  • They will not distress sales of underlying bonds; rather it will continue to receive interest payment and maturity proceeds from bond issuers. As and when the COVID and bond market liquidity improves, they will try to sell the remaining assets at ‘fair value’.
  • NAVs will continue to be published daily
  • Investors will get monthly payouts against the inflows in these funds. The lenders will have a preference for the unitholders.

WHY THIS WIND UP TOOK PLACE?

Franklin Templeton Mutual Funds had been a good performer with a history of high returns, their strategies to generate high returns by taking on higher risk in their debt portfolio always worked, but from the past 18 months, their strategies of taking high risk didn’t work for them. Their strategy failed since ILFS, Vodafone, etc. FT created side pockets in these funds to hold suspect debt. Further, the problems were added by the complete lockdown due to COVID-19, illiquid bond markets, SEBI opening the window for AMCs to borrow to meet redemptions, and the panic redemptions made by the investors. 

With the increased sudden redemption requests, the portfolio shrink, the fund is now left with a higher proportion of less liquid and riskier investments. The mutual fund company borrowed money to pay off redemptions but the redemption was so much high that the company hit the regulatory limit for borrowing.

And before the company reaches a situation where they cannot meet redemption demands, the mutual fund company decided to effectively side-pocket the entire funds.

Should Investors Worry About Other Debt Funds Or Other Funds From Franklin Templeton?

This appears to be a situation unique to these specific debt funds from Franklin Templeton.

Let us understand the logic behind this:

1. Investors who are afraid of losing their money due to credit risk will surely go redeeming their funds.

  • Credit risk funds take additional risks to generate an additional return.
  • Even some well-managed credit risk funds out there will get impacted as much as others, because of this sudden huge redemptions. 

2. Small Fund houses could also face issues. Smaller fund size means more liquidity stress in case of redemptions. 

3. We may expect some kind of government intervention on this but that is not certain.

Here the investors need to understand that, sometimes issues are compounded by public reaction as much as underlying facts and how will this issue react to investor's minds and what decision will they take towards their investment is unclear. 

NO REACTION REQUIRED BY INVESTORS INVESTING IN LOW CREDIT RISK FUNDS

If you are invested in debt funds with low credit risk and low-interest rate risk that we always recommend tour debt fund investors then you need not worry, stay invested. There is no need to take any action or get worried.

While recommending Debt fund schemes to invest to our investors we generally eliminate certain categories of debt funds by their very nature, they are in the not recommended funds.

Within the categories that we recommend, are picked up after an analysis of their portfolio risk for all debt funds. We also ensure that our recommended funds are large enough to minimize liquidity risk.

You can contact us at Shri Ashutosh Securities Pvt Ltd., for any assistance, we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).