To protect investors’ assets from market related dislocation amid COVID-19 pandemic, trustees of Franklin Templeton Mutual Fund in India announced to wind up their suite of six yield oriented, managed credit funds, effective April 23, 2020. “The decision to wind up these funds was an extremely difficult one, but we believe, it is necessary to protect value for our investors and present the only viable means to secure an orderly realisation of portfolio assets. Significantly reduced liquidity in the Indian bond markets for most debt securities and unprecedented levels of redemptions following the COVID-19 outbreak and lockdown has compelled us to take this decision,” says Sanjay Sapre, President, Franklin Templeton India.
This comes after a careful analysis and review of the recommendations submitted by the Franklin Templeton AMC, to protect value for investors via a managed sale of the portfolio. However, as per the AMC all other funds managed by Franklin Templeton Mutual Fund in India – equity, debt and hybrid – are unaffected by this decision.
“We remain fully committed and aligned with the interests of our investors and aim to assist the trustees to fully exit the managed credit strategy funds at the best possible value,” says Sapre.
As other funds are managed by independent teams of investment managers, they would continue to perform as per their respective investment mandates.
The six wind up schemes are Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund.
“The debt funds are dominated by corporates and HNIs from investment side and most of the corporates due to COVID-19 lockdown have liquidity issues and are therefore aggressively redeeming debt mutual funds to meet cash requirements.
Franklin Templeton was not able to fund these redemptions and therefore winded up six schemes under redemption pressure, now as and when the money is realised the same will be credited to the unit holders,” says Omkeshwar Singh, Head- Rank MF, Samco Securities.
As per some of the advisors, when it comes to the overall corporate bond market, there are approximate 40-45 per cent papers that are rated below AAA* out of which *20 per cent are not even rated. “With possible further extension of lockdown, these unrated papers might face difficulties in liquidity. Also, any papers below AAA grade may also be at risk selectively, depending on the industry and cash flow of individuals companies.
Historically, 15-20 per cent of the papers which are below grade C have *Defaulted* on their debt obligations,” points out Amit Jain, Co-Founder & CEO, Ashika Wealth Advisors.
As per Morningstar India’s note on this recent development, Franklin Templeton is among the first few AMCs to explore opportunities in the lower credit space in the Indian fixed income markets. They have been investing in that segment for over a decade now and have performed well so far.
“The fund house did take measures to meet redemption pressure by way of getting borrowers to pre-pay debt, selling bonds to banks and using the credit line provided by banks. However, with unprecedented high redemptions from these funds, it came to a situation where these were not viable options anymore. Basically, it reached a stage where the manager started finding it difficult to meet the redemption demand without impacting the returns. For instance, in the month of March alone, cumulatively, these funds witnessed an estimated net outflow of INR 9,148 crores,” says Morningstar India’s in its brief note.
As per the AMC, the details of the winding up process would be communicated to existing unitholders of the funds impacted by this decision at the earliest. However, the funds would continue to publish their net asset values daily, and investors will not be charged any investment management fee on these funds, going forward. “Retail Investors should be Prudent while investing in debt funds and should always look only for the quality of the portfolio and should completely ignore past performance, big names and big brands while making investments,” says Singh