Franklin Templeton, the country’s eighth largest mutual fund house, has spooked debt fund investors, as it is winding up six of its fixed-income schemes. These funds 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.
Put together, these funds had around Rs 25,000 crore in assets under management, so to wind down these funds with high AUMs is unprecedented. Why did a large fund house like Franklin Templeton, which had managed these funds for over a decade, take such a drastic step?
The fund house pointed to severe market dislocation and illiquidity caused by the COVID-19 pandemic as a reason to wind up these schemes and protect the value of its existing investors.
“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,” said Sanjay Sapre, president, Franklin Templeton–India.
Industry watchers say, some debt fund categories like credit risk funds had been facing redemption pressures for over a year, and these pressures had only increased in recent weeks. Some times the redemption pressures can rise to such an extent that a fund house may have to borrow money from banks to repay investors.
These six funds being wound down means, the units of the funds will no longer be available for purchases or redemptions. So, even if some one had started a systematic investment plan (SIP) or systematic transfer plan (STP) or systematic withdrawal plan (SWP), it will be stopped.
What happens to the investments of the people in these schemes?
The fund house will continue to publish the schemes’ net asset value daily. The trustees with the assistance of the investment manager will liquidate the underlying assets the funds had invested in and the proceeds will then be distributed to investors. More details of the winding up process will be communicated to existing unitholders.
The money for now is locked. So, even if an investor wanted that money for emergency needs, it won’t be available, until the particular scheme liquidates the assets and the money so generated is then repaid to the investors. What the fund house has said is that there will be no investment management fee that will charged on these funds going forward. That means there won’t be any expense charged to an investor.
Mutual Fund investments are subject to market risk. But, when one of the large fund houses takes such a extreme step, investors in other debt fund schemes and other mutual fund houses are bound to panic. Several top mutual fund heads have come out to calm these jitters and said that the Franklin Templeton incident was a one-off and there was no significant risk in debt funds, including credit risk funds, even in these challenging times.
“Between 20 per cent to 30 per cent of credit risk funds have AAA (rated) exposure and some amount of cash. Almost 60 per cent to 70 per cent of a credit risk fund has reasonably high quality of AA and above (rated) paper. The credit risk fund name seems to communicate an impression that everything in that fund is vulnerable to credit events, but the reality is not so,” said Milind Barve, managing director of HDFC Asset Management Company.
Nilesh Shah, managing director of Kotak Mahindra Asset Management Company also pointed that what had happened was an isolated event and the issue was not about lack of cash across the mutual fund industry.
“Majority of mutual funds have no borrowing whatsoever in their portfolio, even though they are permitted to borrow 20 per cent of their AUM for repayment and dividend publication. This clearly shows that there is no dearth of liquidity in the mutual fund industry,” said Shah, who is also the chairman of Association of Mutual Funds of India.
Raghvendra Nath, managing director of Ladderup Wealth Management, feels this crisis will lead to more fears among debt fund investors and redemption pressures across the industry could go up. He feels that Franklin Templeton should reinforce to is investors that the money is safe.
However, he advises that there is no need to worry for investors and they should not rush to withdraw their money from debt fund schemes.
“Investors should not panic. If they are invested into good quality fund houses they should have the trust that the fund house will manage. Acting in haste doesn’t make any sense right now. Interest rates have come down quite a bit and there is a very high possibility they will come down more. So, actually investors stand to lose by moving out and investing into an overnight fund or a liquid fund where they gain 3-4 per cent returns,” said Raghvendra Nath.
Franklin Templeton has been among the oldest surviving foreign fund houses in India, launched back in 1993. Over the years several foreign fund houses like BlackRock, ING and Fidelity have entered and exited India. Despite the current crisis, the US-headquartered fund house said it remained committed to the India business.
“Franklin Templeton has a long history of over 25 years in India, with 33 per cent of our global workforce based there. Our commitment to the market and our investors in India remains steadfast,” said Jenny Johnson, president and CEO of Franklin Templeton.