Franklin Templeton closure of Debt funds schemes
As death tolls due to novel coronavirus continue to surge, the sledgehammered economy is somehow trying to revive itself. Covid 19 is making us as well as organisations, financially sick. Financial liquidity is being clawed at, money is getting eroded, the investors are now looking down from the edge of a high cliff. To make matters worse, Franklin Templeton announces shut down of debt fund schemes on 23rd April this year.
What is the matter of concern? What made Franklin shut down doors on the face of its debt investors?
The past two months have been tumultuous for the bond markets. The IL&FS crisis had already panicked the Indian debt market in 2018. Due to illiquidity and market relocation arising from the pandemic, Franklin Templeton issues a statement on 23rd April declaring wind up of six debt funds. Due to investors panic in the industry, they started selling off their bonds which becomes a top reason why Franklin shut down funds. As of April 22 the total AMU or Assets Under Management was INR 25,856 crores.
What are the six funds that were wound up? Which funds are stopped?
- Franklin India Dynamic Accrual Fund
- Franklin India Credit Risk Fund
- Franklin India Low Duration Fund
- Franklin India Short Term Income Plan
- Franklin India Ultra Short Bond Fund
- Franklin India Income Opportunities Fund
The closure of the funds will be effective from Friday. Let us understand Franklin’s composition of the investment in bonds.
As on March 31, Franklin had,
- Franklin India Low Duration Fund- 62.8 percent in A rated bonds, 45.76 percent in AA.
- Franklin India Dynamic Accrual Fund- 44 percent in A rated bonds, 52.7 percent in AA.
- Franklin India Credit Risk Fund- 49.6 percent In A rated bonds, 60 percent in AA.
- Franklin India Short Term Income Plan- 57.5 percent A rated bonds, 58.6 percent AA rated.
- Franklin India Ultra Short Bond Fund- 23.9 percent A rated bonds, 82.8 percent in AA
- Franklin India Income Opportunities Fund- 41 percent A rated bonds, 63.97 percent in AA.
These are low rated bonds and selling them off at low prices will erode Franklin’s portfolios. This is what Sanjay Sapre, the President of Franklin Templeton states.
When will investors get back their money?
Blatantly stating, if you are an investor, luck is not with you. The debt funds are wound up which clearly denotes no further transactions will take place be it purchase or sell. However, investors will get back their money on maturity but at a staggered amount. This is a liquidation process where all the assets will be liquidated or sold off to clear the existing liabilities. The mutual fund house has not specified a time frame except igniting a hope to realise your dues as soon as possible. You cannot withdraw the money you have invested even if you have an emergency! Just keep your fingers crossed and stay updated. Will the mutual funds commence again? The answer is No.
What will Reserve Bank of India do to save these mutual funds?
RBI had stepped in once in 2008, it might step in again. The world crisis then jolted the mutual funds industry and RBI had opened a special window to save mutual funds industry from drowning. With Operation Twist carried out recently, RBI bought long term bonds for INR 10000 crores and sold off short term for INR 8501 crores. Through this, RBI wants to achieve lower borrowing rates for loans and deposits promoting easy finance to stabilise liquidity. This can create a problem for bond sellers. The problem in focus here does not encompass the whole industry but specific funds. But it is highly probable that terror will spill over to a mutual fund industry as a whole. In that case we can wait for RBI to intervene.
What risks arise over the trust of public over mutual funds?
The actions of Franklin will tend to turn all tables against mutual funds. Investors will prefer a safe haven for their investments by choosing fixed deposits and gold over securities. If one of the biggest mutual fund houses can go haywire, the investors have no option but to play with risks. Even if the Covid 19 eases out, banks will get flooded with deposits. Not to mention the PNB crisis and the Yes Bank one, a bank will still be preferred to be a better option when it comes to investor’s safety. In the coming years we can see a drop in the mutual fund industry. This year has witnessed a historic market crash and even a negative oil price. Franklin Templeton’s announcement is creating another history.