In an unprecedented move, Franklin Templeton Mutual Fund has closed down six of its debt schemes in India.
In an unprecedented move, Franklin Templeton Mutual Fund has closed down six of its debt schemes in India citing severe redemption pressure and illiquidity in the bond markets amid the ongoing coronavirus crisis.
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The funds which have been shut are Franklin India Low Duration Fund, Ultra Short Bond Fund, Short Term Income Plan, Credit Risk Fund, Dynamic Accrual Fund and Income Opportunities Fund, the company said in a statement.
The fund house believes that the market will not return to normalcy soon because of coronavirus disruption and this decision may protect value for investors via a managed sale of the portfolio.
Let's understand what went wrong with Franklin Templeton Mutual Fund and how it will impact debt investors:
How did Franklin end up here?
The extreme drop in liquidity in the bond markets, coinciding with very large redemptions following the COVID-19 outbreak compelled the fund house to make this decision, the company said.
"This decision may protect value for investors. It is the only viable means to secure an orderly realisation of portfolio assets," it added.
What are mutual fund experts saying?
Debt mutual funds, even some liquid funds which are considered the safest, have in the recent past experienced tremendous volatility.
These six schemes of Franklin Templeton Mutual Fund had taken aggressive credit calls in their portfolios, according to Ankur Choudhary, Co-Founder and CIO, Goalwise, a mutual fund investment online platform.
"They can’t sell these to meet redemption requests, so they decided to close the fund itself," he said.
According to Sanjiv Singhal, Founder, Scripbox - a financial company that provides mutual funds investments, Franklin Templeton AMC has had a history of high returns, by taking on higher risk in their debt portfolio.
"This strategy started to show cracks over the past 18 months, since ILFS, Vodafone, etc. FT created side pockets in these funds to hold defaulting/suspect debt. Our understanding is that recent issues like COVID-19 lockdown, illiquid bond markets, SEBI opening the window for AMCs to borrow to meet redemptions, etc. led to further problems. Worried investors withdrew money which further made the problem worse," he says.
As the portfolio shrinks, Singhal adds, the fund is left with a higher and higher proportion of less liquid and probably riskier investments. The mutual fund borrowed money to pay off redemptions but appears to have hit the regulatory limit for borrowing.
What this means for investors of these six Franklin Templeton funds
As per the announcement, no investments or withdrawal will be allowed in these six schemes from Friday.
"Investors will not be able to withdraw or transfer their existing investments or start any SIP in those schemes, or make fresh investments in them," explains Adhil Shetty, CEO, BankBazaar.
So, when will the investors get their money?
It is expected that once the macroeconomic situation improves, the cash-flow pains will be relieved, and they be able to make good on their debts, allowing investors to withdraw their investments, according to Shetty.
FT will do an orderly sale of their investments and return the money to investors. They may publish a Net Asset Value (NAV) for the schemes on a daily basis and eventually communicate more details on an exit strategy
"This step is in a way similar to temporarily blocking withdrawals from a bank. However, time duration can't be predicted," explains Singhal.
Should investors also worry about other funds from Franklin Templeton?
This appears to be a situation unique to these specific debt funds from Franklin Templeton. Experts feel that credit risk funds are going to face redemptions by people worried about the safety of their money.
Credit risk funds take additional risk to generate additional return and the current economic environment has led to defaults.
"While there are some well-managed credit risk funds out there, these will get impacted as much as others. Smaller funds/ fund houses could also face issues. Smaller fund size means more liquidity stress in case of redemptions," say experts.
They are hoping that there will be some regulatory/government intervention on this soon.
"But, sometimes issues are compounded by public reaction (panic!) as much as underlying facts and whether this could become a widespread issue is unclear. Our advice to investors is please don't take any decisions without consulting with a professional advisor," advises Singhal.
First Published: IST