Last night Franklin AMC has announced they are closing the following debt funds -
- Franklin India Low Duration
- Franklin India Dynamic Accrual Fund
- Franklin India Credit Risk
- Franklin India Short Term Income Plan
- Franklin India Ultra Short Term Bond Fund
- Franklin India Income Opportunities Fund
In the circular provided by the AMC, it is mentioned that - The Trustees of Franklin Templeton Mutual Fund in India announced that they have, after careful analysis and review of the recommendations submitted by Franklin Templeton AMC, and in close consultation with the investment team, voluntarily decided to wind up their suite of six yield-oriented, managed credit funds, effective April 23, 2020.
In light of the severe market dislocation and illiquidity caused by the COVID-19 pandemic, this decision has been taken in order to protect value for investors via a managed sale of the portfolio.
Details of the winding-up process will be communicated to existing unitholders of the funds impacted by this decision at the earliest. The funds will continue to publish their net asset values daily, and investors will not be charged any investment management fee on these funds, going forward. Units of the funds will no longer be available for purchases and redemptions, post-cut-off time on April 23, 2020. This includes purchases or redemptions through Systematic Investment Plans / Systematic Transfer Plans / Systematic Withdrawal Plans.
What led to this event?
Over the past few weeks certain financial institutions have redeemed their investments for their needs in view of the current economic environment. When investors redeem from the funds, the fund manager will have to sell the bonds/papers/deposits in the funds to honour the redemption requests. But these funds have invested in many bonds which are illiquid and could not be sold due to lack of buyers. Due to this redemption pressure, the AMC has decided to close the funds.
However, the AMC cannot wind up a fund on their own. They will have to follow the due procedure outlined by SEBI and receive approval from the unitholders as outlined in this circular -
Until the formal approval is received, the AMC has imposed the following restrictions.
- No further transactions allowed in the scheme (Purchase/Redemption/Switch)
- NAV will be declared everyday
- The AMC will start the process of selling the bonds in the fund and issuing the money to investors
- No Asset management fee will be charged on these schemes
- Investor money will held in the fund until the time the proceeds are paid out
What should investors do?
The investors currently have no other option but to wait it out. The AMC will shortly start selling the bonds and securities in the fund. It is important to note that the fund manager might not be able to sell the bonds right away in this situation. Hence the investors will automatically receive the amount in a phased manner as and when different bonds are being sold.
To an extent, the action of the AMC is justified and is the best way to protect the investors' money.
When will investors receive the money?
We cannot say for sure at this point. Investors in the short duration funds can receive the money anytime in the next few months upto few years. Long term funds can take even up to 5 years or more.
Will investors receive the entire amount?
The amount will be paid back depending on the price at which the bonds are sold. Selling the bonds is a difficult task for the AMC at the moment and they might have to sell it a discount. They will pay the redemption amount depending on the final sale amount which we cannot predict for now.
What should other debt fund investors do?
This incident does not mean that all the debt funds are in trouble, and it is incorrect to assume so. Investors in other debt funds of Franklin apart will not be affected. Incidents of downfall and downgrades in the past is not new to Franklin AMC.
It is a crucial lesson for investors who make investments purely based out of past returns without analyzing the fund in detail. Each of the 6 funds mentioned above were 5 star rated and provided highest returns in the respective categories between 2014 - 2019. This has led to many investors investing without proper analysis.
Investors in debt funds should revisit their existing investments to ensure that the debt funds are invested in high quality bonds and deposits and do not take undue credit risk. You can look at the underlying holdings to check the credit quality. Moreover, if your debt fund has been providing 9% when the average return is 7% then it is a clear indication that the fund has credit risk. Debt funds are meant for investors to park their money with low volatility, investors should not chase returns. As a category, debt funds are still suitable for a variety of investors and financial goals but proper due diligence and research needs to be done prior to investing in them.
It is also a huge lesson for AMCs and advisors who should stop recommending debt funds in the name of "higher returns".
If you have any questions, please feel free to drop a comment below.