Franklin AMC Decision on closing 6 Debt Funds

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:-.

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.

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.