Franklin Templeton Debt Funds – What Went Wrong with 6 Funds?
In an unprecedented event Franklin Templeton AMC has decided to wind up 6 of its debt mutual funds which are listed below:
• Franklin India Low Duration Fund
• Franklin India Ultra Short Bond Fund
• Franklin India Short Term Income Plan
• Franklin India Credit Risk Fund
• Franklin India Dynamic Accrual Fund
• Franklin India Income Opportunities Fund
This means that unit holders of these mutual funds can neither redeem their investments nor invest fresh money into it.
The reason cited by fund house that they don’t see enough liquidity in market to continue these schemes and they want to protect their existing investors in these funds by creating segregated portfolios out of it.
Below is the press note by the AMC; Link for the same is here
It is believed that the total investment amount in these funds are worth 28000 Crores! This raises a question that is RBI doing enough to infuse liquidity into markets? Why a fund managing huge amount of money is being forced to segregate large proportion of their portfolio?
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What is the impact on existing investors of Franklin Templeton debt funds?
The investors will not loose their entire money invested in these mutual funds. By winding up these funds the Franklin Templeton AMC protected their unit holders from redemption pressure which may be a good thing to do considering the current scenario.
The unit holders of the mutual fund will eventually get their money when the companies where the money of these funds are invested pay them back. If some companies default then there will be write backs. So effectively the Franklin Templeton debt funds will still report NAVs, it’s just that you can’t redeem or make any new investments.
The AMC has invested the money in high-interest-yielding instruments. So if all the companies pay back the amount then investors will have good returns on their investments.
The Franklin Templeton AMC may try to sell its investments in these high yielding companies to investors with a discount(if some one wants to purchase) specially when the interest rates are falling then the money received from those sale shall be given to the existing investors.
Let’s look at the portfolios of each of the debt funds:-
Franklin India Low Duration Fund
If you see the companies in this fund; They have credit rating on A/A+/AA- etc. The top holding is yielding 10.75%!
Franklin India Ultra Short Bond Fund
Top holding is Vedanta yielding 9.45%
Franklin India Short Term Income Plan
Top holding Shriram Transport yielding 10.25%
Franklin India Credit Risk Fund
Top holding Shriram Transport yielding 10.25%
Franklin India Dynamic Accrual Fund
Top holding Shriram Transport yielding 10.25%
Franklin India Income Opportunities Fund
Top holding Piramal Enterprises yielding 8.25%
What should investors do with franklin templeton debt funds?
Well, the investors of these funds do not have any choice now. They sit patiently and wait for the interest accruals to be credited to their accounts. Each fund is segregated to 1 or many segregated portfolios as below:-
• Franklin India Low Duration Fund (No. of Segregated Portfolios – 2)
• Franklin India Ultra Short Bond Fund (No. of Segregated Portfolios – 1)
• Franklin India Short Term Income Plan (No. of Segregated Portfolios – 3)
• Franklin India Credit Risk Fund (No. of Segregated Portfolios – 3)
• Franklin India Dynamic Accrual Fund (No. of Segregated Portfolios – 3)
• Franklin India Income Opportunities Fund (No. of Segregated Portfolios – 2)
Are Debt Mutual Funds Safe?
This event raises a big question on the safety net of debt mutual funds. The debt funds are sold to investors saying these funds carry far lesser risk than the equity funds but after this event one need to ask a question are debt mutual funds safe?
In equity funds, you have a choice to get out anytime but in debt funds, if the fund manager has invested the money in a bad instrument then your entire capital is wiped out.
After this episode of franklin templeton debt funds winding up the plans, the investors are stuck with their investments. They will not get the money when they need it then what’s the point in investing in these schemes which carry a very high risk on capital.
SEBI needs to come out with strong guidelines about debt mutual funds so that these kinds of fiasco shouldn’t happen in future.
But at the end of the day – Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
Everyone gets away with these lines!
Do read – How to select mutual funds in India – 5 point checklist
Disclaimer – All the above information about mutual funds has been obtained from www.franklintempletonindia.com and the portfolio information has been obtained from value research online.
