What happened in Franklin Templeton debt schemes?
In an Unprecedented move on 23rd April 2020 post cut-off time, Franklin Templeton announced winding up of six of its debt funds effective from 24th April 2020. These six schemes put together as on 31-03-2020 had an AUM of Rs. 26,000 crores roughly.
Which are these six funds that have been frozen by the Fund House?
The Funds are below:
- Franklin India Ultra Short Fund
- Franklin India Low Duration Fund
- Franklin India Short Term Income Plan
- Franklin India Dynamic Accrual Fund
- Franklin Income Opportunities Fund
- Franklin India Credit Risk Fund
What does this mean?
This means that the six schemes in question will not allow any further transaction – All purchases or redemption through Systematic Investment Plans (SIP) / Systematic Transfer Plans (STP) / Systematic Withdrawal Plans (SWP) will also not be allowed henceforth.
Why did this happen?
In recent times, because of a weak credit environment, these schemes were facing significant redemption pressure. These Schemes were heavily invested in poor credit quality papers of companies which are largely associated with so called “negative sectors” at the moment like NBFCs, Power, Infrastructure, etc. For meeting the aforesaid high redemption pressure, there were not enough good quality papers to support the same. Hence, the fund house put everything on hold so as to avoid the redemption and book heavy losses.
What does the AMC plan to do?
The AMC plans to wait for the underlying papers to mature and the borrowers to honor the same. Besides this, they can also sell the papers in the secondary market subject to availability of takers at a fair price. However the actual money you get back can be hit by defaults in portfolio or the AMC selling papers at lower value.
When can the Investors expect their money back?
The Fund House will publish NAV on a daily basis and shall return back the money in a staggered manner. An approximate time for each scheme can be ascertained by looking at the average maturity of the paper held at these schemes.
However in case the market recovers, the AMC can sell the papers to facilitate repayment prior to maturity.
What should the investors in above schemes do?
There is no action required. The fund house will sell or realize the underlying papers and repay back to the Investors. But again, it all depends on the extent of default and the ability of AMC to sell underlying papers at a fair price.
Can something similar happen to my Mutual Fund?
Always keep a check of credit quality before investing into Debt Mutual Funds.
Typically a portfolio with anything greater than 95% of AAA and equivalent is considered to have strong credit quality. Our market has enough liquidity for high credit quality papers.
Look for AAA rated companies, Sovereigns, Reputed companies before investing in debt instruments and you shall be in winning situation.
How did Ontrust help its investors to stay out of these Funds?
Our research desk keep a continuous check on the credit quality of the schemes held by our clients. It immediately raises a red flag and restores the portfolio credit quality as soon as a threat is suspected.
As a result of this proactive approach, we are proud to say that we did not have a single investment in any of these six funds.
One Comment
good to hear that no investments were there in any of those 6 funds of Franklin Templeton
happy and satisfied to be associated with you ppl