Franklin Templeton Mutual fund announced the winding-up of six of its open-ended debt Mutual funds effective from 24th April 2020. This has come as a shock to all mutual fund investors in India. Lakhs of retail and HNI investors are affected by Franklin Templeton’s decision.
The AMC has cited heavy redemption pressure and lack of liquidity in bond markets for the shutting of schemes.
In this article, I will cover all important aspects of this crisis, which I think every mutual fund investor should know.
Who is Franklin Templeton Mutual fund?
Franklin Resources Inc. is an American multinational global investment firm founded in New York City in 1947 by Rupert H Johnson as Franklin Distributors, Inc. Franklin Templeton managing US $698 billion in assets under management (AUM) as of 31st Dec 2019.
Franklin Templeton has set up its India office in 1996 as Templeton Asset Management India Pvt. Limited. It has started a mutual fund business with the launch of the Templeton India Growth Fund in September 1996. Franklin Templeton is India’s ninth-largest mutual fund house. As of 31st March 2020, AMC managing Rs 117305 crores in Asset Under Management (AUM).
What is a debt mutual fund?
A debt mutual fund invests investors’ money in fixed-income securities like government securities, debentures, corporate bonds, and other money-market instruments. By investing money in such instruments, debt mutual funds lower the risk factor considerably for investors. This is a relatively stable investment that could generate wealth.
Which funds of Franklin Templeton are closed
AUM (in Cr)
As on 23/04/2020
|no of Segregated Portfolio||Average maturity as on 31/03/2020|
Franklin India Ultra Short Bond Fund
Franklin India Low Duration Fund
Franklin India Short Term Income Plan
Franklin India Income Opportunities Fund
Franklin India Credit Risk Fund
Franklin India Dynamic Accrual Fund
Franklin Templeton Fund’s house has said that it will publish a Net Asset Value (NAV) for the schemes on a daily basis and eventually communicate more details on an exit strategy. A rough measure of time can be taken by looking at the average maturity of the paper held in these schemes.
Each fund has its own cash flows and borrowings and therefore will be able to return monies at different points of time.
If you have units in one of the segregated portfolios in lieu of previous defaults in Vodafone Idea or Yes Bank, these are entirely separate from the main portfolios. You will get payments in these if and when the borrowers in question payback or there is recovery against them.
What went wrong with Franklin Templeton mutual funds?
Debt mutual funds, even some liquid funds which are considered the safest, have in the recent past experienced tremendous volatility.
The managers of most credit risk funds have been seen chasing high yields and ignoring the associated default risk. This strategy worked well when the external environment was good. However, when there is trouble in the economy, even stronger companies are finding it tough to raise funds, companies with a weaker balance sheet and higher leverage (AA rated and below) are most at risk
Franklin Templeton AMC has had a history of generating high returns, by taking on higher risk in its debt portfolio. These six schemes of Franklin Templeton Mutual Fund had taken aggressive bets in their portfolios.
“Significantly reduced liquidity in the Indian bond markets for most debt securities and unprecedented levels of redemptions, following the COVID-19 outbreak and lockdown has compelled us to take this decision,” said Sanjay Sapre, president, Franklin Templeton–India
What will happen to Franklin Templeton Investors?
- As the Franklin Templeton debt schemes have been wound up, investors in these schemes will not be able to withdraw their money immediately. In fact, they will have to wait till the fund house sells all its securities.
- As Templeton debt schemes have closed subscriptions and redemptions, your systematic investment plans (SIP) will stop automatically.
- If you had enrolled for systematic transfer plans your money is blocked. Your STP has just stuck-up as the transfers to your equity funds will now not happen.
- Investors will no longer be allowed to make fresh purchases or sales from these funds. The systematic plans, including systematic investment plans, systematic transfer plans, and systematic withdrawal plans will also be suspended.
- Franklin Templeton said you will not have to pay any exit load. However, you will be liable to pay tax on any gains you have made in the schemes when the money is returned.
Will the investor will get back the money?
The fate of investors of the six closed debt funds and other funds will depend upon how quickly the Franklin Templeton fund house is able to sell all its securities held in their portfolio.
Holding till maturity is not an option because a good number of securities have a maturity period of above 3 years. Therefore, the fund house will have only one option left is to find buyers in the quickest possible time.
The higher the proportion of sovereign and cash investments of a debt fund, the easier it is to wind up the exposure. However, the fund house has already sold most of its sovereign debt securities to handle the redemption pressure since August 2018.
The greatest indicator of the scale of the problem is that the funds are left with very few AAA-rated securities in their top 20 holdings. Most of the securities are either AA rated or below. Now, it is left with mostly corporate debts which will be very difficult to sell in current market conditions.
The unitholders will be paid as and when the securities come up for maturity. Once the security matures and the fund house receives proceeds from the issuer, they will pay the money to unitholders in the scheme. Typically, the shorter the duration of the portfolio, the faster the scheme is likely to be wound up, and unitholders can expect.
Banks have been allowed by RBI to an outright purchase of more than 25 % of Hold till Maturity (HTM) securities in mutual fund’s portfolios in the absence of liquidity in the secondary market. So, if Mutual funds face a lack of liquidity in the secondary market for investment-grade securities, they can sell these holdings.
The funds available under this scheme will be used by banks exclusively for meeting the liquidity requirements of mutual funds. By extending loans and undertaking the purchase of repos against the collateral of investment-grade corporate bonds, commercial papers (CP), debentures, and certificates of Deposit (CDs) held by MFs.
The Reserve Bank’s efforts may have come too late for investors of the six Franklin Templeton schemes. But the central bank hopes it will reduce the chances of other mutual fund houses being forced into a similar situation.
In the latest development, Franklin Templeton fund house said in a statement that:
“All six schemes have received total cash flows of Rs 14391 cores till 30th January 2021 from maturities, coupons, and prepayment since winding up the schemes.”