Franklin Templeton debt funds – What went wrong with 6 funds?

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Franklin Templeton debt funds- What went wrong?

Do read – Are debt funds safe?

It an unprecedented event Franklin Templeton AMC have decided to wind up 6 of its debt mutual funds which are listed as 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

 

Franklin Templeton debt fund

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?

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 Templeton low duration fund portfolio

Franklin India Ultra Short Bond Fund

Top holding is Vedanta yielding 9.45%

Franklin India Ultra Short Bond Fund

Franklin India Short Term Income Plan

Top holding Shriram Transport yielding 10.25%

Franklin India Short Term Income Plan

Franklin India Credit Risk Fund

Top holding Shriram Transport yielding 10.25%

Franklin India Credit Risk Fund

Franklin India Dynamic Accrual Fund

Top holding Shriram Transport yielding 10.25%

Franklin India Dynamic Accrual Fund

Franklin India Income Opportunities Fund

Top holding Piramal Enterprises yielding 8.25%

Franklin India Income Opportunities Fund

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 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 really need to ask a question are debt mutual funds really 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 actually 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 kind of fiasco shouldn’t happen in future.

But at the end of day – Mutual Fund investments are subject to market risks, read all scheme related documents carefully. 

Everyone gets away 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 www.valueresearchonline.com


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