Franklin Templeton Mutual Fund Closes 6 Debt Schemes – What it Means to You & What Should One do?

Last Updated : April 24, 2020, 10:49 p.m.

Franklin Templeton Mutual Fund has decided to wind up (permanently shut down) the following 6 schemes and return the money back to investors over a period of time.

• Franklin India Low Duration Fund
• Franklin India Ultra Short Bond Fund
• Franklin India Short Term Income Plan
• Franklin India Credit Risk Fund
• Franklin India Dynamic Accrual Fund
• Franklin India Income Opportunities Fund

All these are debt funds which had invested in a combination of corporate bonds, debentures, government securities. However, a major portfolio of these debt schemes was invested into lower-rated corporate bonds( AA- and below) which owing to the current market situation have become illiquid (they are unable to sell the same in the bond market). As per Franklin Templeton Mutual Fund, they were forced to take this step in the interest of investors as a severe liquidity crunch combined with a high percentage of redemptions could have led to a full blown crisis in these funds.

What happens to money invested in these funds?

All these schemes together hold an AUM of 30,000crs roughly. Since the schemes have been wound up, no further transactions-investment, withdrawal , SIP,SWP, STP and switches can be done. This means that all existing investors of these funds can’t withdraw their funds for now, there will be a status quo in their investments. However the fund will keep declaring an NAV on a daily basis, as and when they receive funds by selling those securities gradually. Those funds will be returned to the investors. The valuation, however, could be lower depending upon how much money Franklin Templeton recovers. And it could take 3-6 months for the entire money to be returned.

Is my money safe in other funds?

Association of Mutual Funds of India (AMFI) which is the body of mutual fund companies in India has issued a press release reassuring investors should not panic and the majority of the funds in debt schemes have been invested in good quality securities. However, one should check his/her mutual fund portfolio and consult his/her financial advisor on necessary steps if required. This is a specific event with one mutual fund company and we should not generalize it to the entire mutual fund industry. Having said that, panic selling in other debt funds due to this event could lead to a liquidity issue with other funds as well.

Does this mean debt funds are risky?

Debt funds are perceived to be a replacement for a fixed deposit and considered risk free. However, debt funds carry three major kinds of risk:

• Credit Risk – This is the risk of a company going bankrupt and unable to return money to the lender.
• Interest Rate Risk – Fluctuation of interest rates is a risk for debt funds.
• Liquidity Risk – This is the risk when a particular fund faces unusually high levels of redemptions and is unable to meet them due to the low liquidity of the securities it is holding.

Every investor must check his/her portfolio and evaluate it against all these three risks and take an informed decision.

What should I do with other debt funds in my portfolio?

One should closely evaluate all debt schemes in the portfolio and weigh the above-mentioned risks. The COVID pandemic has led to an instability in the financial markets leading to events such as these. We would advise you to invest in just two categories of debt funds-overnight and liquid funds. These are the safest debt funds with very high liquidity, money invested in credit risk or corporate bond funds should be switched into these funds. We had a couple of weeks back highlighted these risks with debt funds in another blog of ours, the same can be read here – https://www.wishfin.com/mutual-fund/top-mutual-fund-picks-and-strategies-amid-coronavirus-crisis/

These are unprecedented times, we are seeing many firsts such as entire nations in lockdown, oil prices becoming negative and now this-winding up of funds by a major AMC. All these highlight uncertainties and unknown risks in the financial systems and economies globally. Who knows we might see some more first time events which could have a bearing on the financial markets. As an investor, these are times to be very careful with your portfolios and not leave it as it is. Analyse your portfolios deeply, consult your financial advisors and take appropriate measures.