Rupakumar Pradhan, CFPCM, CWM®

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Franklin Templeton To Wind Up 6 Debt Funds- What should I do?

Franklin Templeton To Wind Up 6 Debt Funds- What should I do?

Franklin Templeton To Wind Up 6 Debt Funds- What should I do?
April 25
13:29 2020

In this unexpected development, Franklin Templeton fund house has decided to wind up six debt funds due to liquidity trouble in the bond market triggered by Covid-19 crisis.  In other way, FT has decided to take this action due to continuous redemptions and their inability to sell adequate bonds in the bond market. This is first time such an event happened in Indian Mutual Fund Industry and also for investors.

The closure is effective from 24th April 2020 (Friday). As a result of this all the SIP (Systematic Investment Plan), STP (Systematic Transfer Plan), SWM (Systematic Withdrawal Plan), and all redemptions and inflows already stopped.

Six Funds affected:

  • Franklin India Low Duration Fund (No. of Segregated Portfolios – 2) –Average Maturity-1.46 years
  • Franklin India Ultra Short Bond Fund (No. of Segregated Portfolios – 1) –Average Maturity-0.62 year
  • Franklin India Short Term Income Plan (No. of Segregated Portfolios – 3) –Average Maturity-2.75 years
  • Franklin India Credit Risk Fund (No. of Segregated Portfolios – 3) –Average Maturity-3.08 years
  • Franklin India Dynamic Accrual Fund (No. of Segregated Portfolios– 3) –Average Maturity-2.55 years
  • Franklin India Income Opportunities Fund (No. of Segregated Portfolios – 2) –Average Maturity-4.28 years

What is Average Maturity?

Debt funds invest in various fixed income or debt securities and each security in the portfolio may have a different maturity. A bond’s maturity date indicates the specific future date on which an investor gets his principal back i.e. the borrowed amount is repaid in full. Average Maturity is the weighted average of all the current maturities of the debt securities held in the fund. The weights are the percentage holding of each security in the portfolio.

Average maturity helps to determine the average time to maturity of all the debt securities held in a portfolio and is calculated in days, months or years. For e.g. a debt fund having an average maturity of 5 years constitutes debt securities held by the fund that, on an average, will mature in 5 years, though individual securities may have maturity different than 5 years.

Why did this event happen?

Just check all funds exposure to credit risk papers (below AA-rated papers) in the portfolio.

For instance, Franklin India Low Duration Fund has 64.7% of its holding in below AA-rated paper, Dynamic Accrual Fund 44.6%, Credit Risk Fund 50.2%, Short Term Income Plan 58.9%, Ultra Short Term Bond Plan 23.9% and Income Opportunities Fund 41.3%.

All big investors (Institutional Investors & HNI Investors) have been continuously pulling out money from all Franklin Templeton debt funds. This has formed redemption pressure on all the funds. That is the fund manager was unable to sell enough bonds to meet the redemptions due to this Covid-19 crisis situation in the market. They borrowed cash to the extent allowed by SEBI Regulations but it appears that is not enough.

There is little enough demand for the low rated debt securities (Below AA-rated Bonds) in current market. This, along with unprecedented redemption pressure in the past months, was the main reason behind FT’s move to stop redemptions for now in six debt schemes.

On this current situation, low rated bonds are hard to sell in the market and may be no buyers at all. Hence the Fund House decided to close the funds to protect existing unit holders.

What should I do?

In this current situation, the fund house has done only one that is taking an approval from trustees. It has to take all the most of the necessary approvals from SEBI and Investors. As per the SEBI MF Regulation (u/s Section 41(1) of SEBI (Mutual Funds) Regulations, 1996), Franklin Templeton fund house will ask approval from all unit holders for winding up the scheme.

The Fund house has now closed the funds (all six funds) from all transactions. What it means is that investors will not get their money now. Investors will get the money as and when the bond maturities happen in the portfolios and it will be converted to cash.

There is no need to over-react at this moment. As per the current situation, fund house will wait until the entire portfolio matures and then distribute the proceeds to unit holders. This means it may take couple of months (as per the average maturity period of the fund). If the average maturity period is very short then it should be liquidated very fast. It depends upon the average maturity period of the fund.

If you have invested in these funds, you have to wait till the bond matures in the fund portfolio. Investors would also do well to stop from chasing just returns without having regards to the risk taken by the respective mutual fund schemes.

First time such an event happened in India!

It is suggested that the investors continue to focus on their financial goals, consult their financial advisor and not get side tracked by an isolated event in a few schemes of one fund house.

Plan Well To Live Well!

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I am a CERTIFIED FINANCIAL PLANNERCM, CHARTERED WEALTH MANAGER®. For the moment, I have shared my experience growing up with you because it had a tremendous impact on how I do what I do.

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About Author

Rupakumar

Rupakumar

Mr. Pradhan has over 22 years of experience in financial services industry. He was previously working with leading Life Insurance Companies, Broking Firms, Distribution Company, Financial Planning Company and Health Insurance Company. He has cleared several NCFM modules & is also AMFI Certified. His expertise is in Comprehensive Financial Planning, Technical Analysis, Portfolio Management, Investment Advisory, Wealth Management & Business Development.

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6 Comments

  1. Chintan
    Chintan April 25, 17:04

    Informative articles

    Reply to this comment
    • Rupakumar
      Rupakumar April 25, 17:49

      Hi Chintan,
      Thanks for the feedback on this article. We sincerely appreciate your insight because it helps us to do our best.

      Reply to this comment
  2. Biswajit Tripathy
    Biswajit Tripathy April 25, 17:22

    This article provides an overview of risk and due diligence requirements with debt mutual funds.
    They are winding up considering the future default and credit risk. A good move to protect.
    Yes, I have learned, faced, and practised so many financial things Practically.
    As an Investor, I believe and faith in my advisor and advisor should stand by investors, not by AMC.
    Thank you.

    Reply to this comment
    • Rupakumar
      Rupakumar April 25, 18:28

      Hello Mr. Biswajit,
      I just saw your comment on this article. Thank you very much for your feedback.Your feedback made a difference for us to do our best. In Investing and Financial planning, risk management is the most important factor. Yes. I agree. Good move to protect clients money. Advisor should act on behalf of the client not the product/scheme manufacurer.
      Our Focus -“Truly Honest Client Oriented Practice.”
      Thanks Again.

      Reply to this comment
  3. Ganga
    Ganga April 26, 12:57

    Very well explained

    Reply to this comment
    • Rupakumar
      Rupakumar April 26, 13:28

      Hi Ganga,
      Thank you very much for your feedback on this article. Your inputs made a difference for us to our best.
      Thanks Again.

      Reply to this comment

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