The Franklin Deb't'acle

In an unprecedented move, Franklin Templeton, amongst the ten largest asset managers in the country, has decided to wind up its 6 credit–risk-oriented debt schemes with effect from 23rd April. In effect, it simply means that investors in these schemes cannot redeem their units or withdraw the funds invested. The cumulative AUM of these schemes are a massive Rs 28,000 crore.


What does it mean for existing investors in these 6 funds?


The only option is to wait out until the money comes. This will take time, and some of the bonds will only payout at maturity. Capitalmind has a sample of how Franklin Ultra Short Bond’s maturity dates are, based on their March 31 portfolio. Assuming payments are rec'd per the maturity profile, you should roughly see 35% of your money paid to you at the end of 2020 and another 37% in 2021 with about 86% paid by 2022.


What caused this closure?

Funds have been facing large redemption requests due to the current uncertain times. During normal times, these are met by selling securities in the secondary market. However, liquidity in the secondary market has dried up following the virus scare. This is because credit risk has increased significantly with businesses coming to a standstill and cash flows of corporates drying up due to the lockdown.

This is eroding investors’ wealth because the instruments in the portfolio are marked to market every day for arriving at net asset values (NAV). Franklin’s action is also to protect value for investors via a managed sale of the portfolio.


What is the impact on the MF industry?

The Association of Mutual Funds India (AMFI) came out immediately on Friday and assured us that our money in debt schemes are safe. Investments are mostly about psychology and this is bound to have a broader impact on the bond market.

When clients call me saying they are comfortable with Equity funds but worried about Debt funds, you know you are in "strange crazy" times!!

What is the impact on your debt portfolio?

I used to find risk-reward in credit funds compelling for appropriate clients and used to recommend these. However, I exited all credit risk funds in late March/early April. A couple of extra % points of return is not worth the uncertainty.


I believe that there is going to be lesser stress on Overnight Liquid Funds and PSU & Banking Funds and have positioned our clients with Debt needs towards these funds.

I expect the debt markets to calm down in some time and the markets will return to a less fearful state. That would provide a great entry point to buy high-quality corporate debt.


In these times, more than usual, the important thing is to be nimble and adapt to the changing world.


Source: Capitalmind, Moneycontrol, Mint

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