Franklin Templeton Shuts 6 Debt Funds
Franklin Templeton India, one of the largest AMCs in the mutual funds space took a hard decision to wind up its 6 schemes in debt mutual funds category effective 23 April 2020. Winding up here means that the fund house is closing the scheme and there will be no fresh investments & redemptions on these schemes. All the ongoing SIPs (Systematic Investment Plan), STPs(Systematic Transfer Plan), or SWPs(Systematic Withdrawal Plan) in these schemes by the investors will be canceled and no other transactions would be allowed.
The schemes which are being closed by Franklin Templeton Mutual Fund include
- Franklin India Low Duration Fund
- Franklin India Dynamic Accrual Fund
- Franklin India Credit Risk Fund
- Franklin India Short Term Income Plan
- Franklin India Ultra Short Bond Fund
- Franklin India Income Opportunities Fund
The above funds have a collective AUM size of around 26,000 Crores.
Main Reasons for Closure
Following reasons are responsible for the closure of the schemes by Franklin Templeton Mutual Funds:
- Credit Risk Exposures: Credit Risk is basically the risks associated with the non-payment or default by the borrowers with regards to the principal and interest payments to the lender.
For this reason, Debt papers or instruments with low credit ratings( the ones who are more likely to default on payments) provide high-interest rates on their bonds to the investors for bearing high risks.
Franklin India’s debt schemes had the credit risk strategy which means “high risk, high returns” for these funds. These schemes were exposed to high credit risks by the way of buying bonds or papers of low rated companies to generate more returns for the investors.
Then came the unprecedented Covid-19 crisis. India saw an outbreak of the Coronavirus Pandemic in early March impacting businesses all over. This was caused by the necessary imposition of lockdown in the country by the authorities. At this time, fear has captured the market and it would be fair to anticipate that more companies could default on their payments, especially the low rated ones.
Amid this crisis, Investors out of fear over their capital losses have been looking to invest or stay invested in High credit quality instruments such as AAA papers, while redeeming their investments in low grade papers.
Now we move to another reason that led to this
- High Redemption Pressures & Liquidity Issues: High Fears and low confidence among the investors amid this slowdown lead to huge sell-offs in the debt market especially in case of credit risk funds. Investors made huge redemptions out of these funds in the last month. The AUMs collectively of these 6 funds have fallen around 26% from the reported numbers on 31st March. This led to the much lower inflows & demand in these schemes and higher demands for AAA-rated papers.
Along with that as a result of the pandemic, the markets have already been facing liquidity issues making it hard for the funds to liquidate or sell investments at the fair rates.
Although RBI announced necessary measures such as TLTRO to improve the liquidity situation in the markets, they haven’t really worked for these credit risk funds as there was no or very little demand for these schemes against the high redemption pressures.
So to meet these huge redemptions by the investors, the Franklin India Funds had to rely on borrowings to fund these redemptions. As per SEBI regulations, a mutual fund scheme is allowed to borrow 20% of the funds assets under management during events like liquidity issues for maximum up to 6 months. But the redemptions were so large that Franklin India needed more funds. This forced them to file an extension request to borrow 30% of the AUM for some schemes to SEBI which was approved.
Rising borrowings under the scheme was making the situation even worse for the investors as well as the AMC. As to repay them, the fund would have to liquidate their papers at huge discounts ultimately leading to high losses for investors.
So the Franklin Templeton India found it prudent to wind up the schemes for protecting further redemptions and losses.
What will happen to the Investors?
Investors would not be able to make redemptions or any investments in these schemes.
Franklin Templeton India has publicly announced that they will try to liquidate the papers and instruments as soon as the market recovers out of this Covid 19 crisis. The fund is expecting to sell off their holdings as the liquidity situation gets better. However, investors may have to wait more for getting their money back depending upon the Macaulay durations of the schemes which they hold.
Macaulay duration is the weighted average time in years that would take for the investments in the fund to mature. In other words, to retrieve the investment amount.
Following are the Macaulay duration data as on date 22 April 2020, released by Franklin India.
|Scheme Name||Macaulay Duration in years|
|Franklin India Ultra Short Bond Fund||0.38|
|Franklin India Short Term Income Fund||2.41|
|Franklin India Credit Risk Fund||2.37|
|Franklin India Low Duration Fund||1.17|
|Franklin India Dynamic Accrual Fund||1.95|
|Franklin India Income Opportunities Fund||3.94|
Note for Investors
According to Franklin Templeton India, they will use the following approach for making payments to the investors on their holdings:
- As the scheme recovers its payments through sell-offs or at the maturities of the scheme, the fund would firstly utilize the money to repay its borrowings and other liabilities as per SEBI regulations.
- The Leftover money after paying off the liabilities will be paid to investors proportionately as per their shares in the holdings.