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Insights on Organization Update by Franklin Templeton India regarding 6 Debt Mutual funds.

Franklin Templeton India launched its operations in 1996 and has serviced investors greatly since then. It has always been one of the top Mutual Fund Companies in India and is expected to continue likewise.

The decision by Franklin on 23rd April 2020 on winding up 6 debt mutual funds which have direct material exposure to higher-yielding, lower-rated credit securities.  The decision has taken has only affected 6 mutual funds out of its approximately 60 mutual funds (39 Open-Ended Funds and 21 Fixed Maturity Plans-FMP). Please check your Franklin Investment Mutual Fund from the list below:-.

All About Franklin AMC Decision on 6 Debt Funds
   

Asset Category

Fund Name

Affected

A. ELSS Fund

Franklin India Taxshield

No

B .Equity

Franklin India Build Fund

No

Franklin India Bluechip Fund

No

Franklin India Equity Advantage Fund

No

Franklin India Equity Fund

No

Franklin India Focused Equity Fund

No

Franklin India Index Fund

No

Franklin India Opportunites Fund

No

Franklin India Prima Fund

No

Franklin India Smaller Companies Fund

No

Franklin India Technology Fund

No

Templeton India Equity Income Fund

No

Templeton India Value Fund

No

C. Fixed Income Funds

Franklin India Banking & PSU Debt

No

Franklin India Corporate Debt

No

Franklin India Credit Risk (+3 segregated portfolios)

Yes

Franklin India Dynamic Accrual Fund (+3 segregated portfolios)

Yes

Franklin India Fixed Maturity Plans (FMP - 21 funds across 6 Series)

No

Franklin India Floating Rate Fund

No

Franklin India Government Securities Fund

No

Franklin India Income Opportunities (+2 segregated portfolios)

Yes

Franklin India Low duration fund (+2 segregated portfolios)

Yes

Franklin India Overnight Fund

No

Franklin India Short Term Income Plan(+3 segregated portfolios)

Yes

Franklin India Ultra Short Bond Fund (+1 segregated portfolios)

Yes

D. Hybrid Funds

Franklin India Debt Hybrid (+1 segregated portfolios)

No

Franklin India Dynamic Asset Allocation FOF

No

Franklin India Equity Hybrid Fund

No

Franklin India Equity Savings Fund

No

Franklin India Life Stage FOF - 20/30/40/50's Plan - 5 funds

No

Franklin India Multi Asset Solution Fund

No

Franklin India Pension Plan

No

E. International Fund

Franklin Asian Equity Fund

No

Franklin India Feeder - Franklin European Growth Fund

No

Franklin India Feeder - Franklin U.S opportunities Fund

No

F. Liquid Fund

Franklin India Liquid Fund

No

What is a Credit Risk Approach? 

These 6 funds had Credit Risk Strategy. It means that after carefully analyzing the company, the investments were done in bonds which:-

  1. Higher default risk compared to AAA bonds.
  2. Investors can expect a higher returns and interest rates.
  3. Majorly in bonds rated AA, A, Below A.

Background:

India’s debt market was already undergoing a crisis that started by the default of IL&FS in September 2018. The crisis escalated further due to rising issues/defaults of companies like DHFL, Anil Ambani Group, Essel group, Vodafone Idea, Yes bank, etc. At a time when already credit risk funds were finding it tough to recover funds in last 2 years, they are now further affected by COVID-19. The lower-rated bond issuing (AA and below) entities are:-

  1.  Finding it tough to raise fresh money
  2. The demand for their bonds are falling
  3. Their bonds have become largely illiquid
  4. The redemption requests have been massive leading to a fall in prices and a rise in yields
  5. Due to the above 4 points, it meant that the ability of these entities to service (repay) their debts has materially decreased.

All these issues forced franklin to borrow money to service the MF redemption requests (they were not getting money from the securities as mentioned in point “e” above). Hence, in an effort to protect the investors who are not selling now & also to avoid borrowing exceeding the permissible SEBI & AMFI guidelines, Franklin took this unprecented decision to shut down 6 funds.

   

S.N

Fund Name

Total Securities

Average Maturity

A and below

AA

AAA/A1+

Cash Eqv

1

F.I. Income Opportunities

48

4.28 years

41.31%

63.96%

0.95%

-6.22%

2

F.I. Low duration fund

54

1.46 years

64.73%

45.76%

1.93%

-12.42%

3

F.I. Credit Risk

80

3.08 years

50.23%

60.06%

0

-10.29%

4

F.I. Dynamic Accrual Fund

74

2.55 years

44.57%

52.76%

0.95%

1.72%

5

F.I. Short Term Income Plan

111

2.75 years

58.85%

58.68%

0

-17.53%

6

F.I. Ultra Short Bond Fund

88

0.62 years

22.56%

84.14%

0

-6.70%

     

Total

282.25%

365.36%

3.83%

-51.44%

 

Way Ahead:

An investor holding any of these funds, cannot place any transaction (Buy/Sell/Switch). All existing SIP/STP/SWP have been automatically stopped. As and when Franklin recovers money from the securities of that fund, the investors will be given that amount. Investors should be prepared now to receive money in parts every few weeks/months and the waiting period to receive the complete money will be approximately the average duration of the fund (Provided there are no defaults or delay’s by the underlying bond owners in making payments)

 

Conclusion:

  1. There is no need to panic and sell either the other Equity as well as Debt Mutual funds of Franklin.
  2. Franklin AMC will publish NAV on daily basis and communicate more details on an exit strategy. Investors can roughly assume average maturity as their expected investments recovery time.
  3. Investors having investment in Credit Risk Debt mutual funds of other AMC’s should analyze the holding of the fund (A/AA/AA) and accordingly take a decision based on their risk profile and objective.
  4. There will not be any exit load or expense ratio charged to investors for these 6 funds.
  5. The existing segregated portfolios (of Vodafone and Yesbank) in these 6 funds will be serviced as and when Franklin receives money from Vodafone &  Yesbank.

Thank you for reading. Please contact me for any further doubts/issues.


 

Published by

CA Navin Agarwal. CFA
(CA)
Category Others   Report

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