April 23, 2020

Franklin Templeton India Closed 6 Debt Funds – What investors can do?

Today Franklin Templeton India closed it’s 6 Debt Funds giving the reason that it found difficult to manage due to the COVID 19 situation.

In it’s communication, Franklin Templeton India mentioned as below.

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.

This action is limited to the below-mentioned funds, which have material direct exposure to the higher-yielding, lower rated credit securities in India that have been most impacted by the ongoing liquidity crisis in the market. All other funds managed by Franklin Templeton Mutual Fund in India – equity, debt, and hybrid – are unaffected by this decision. These other funds are managed by independent teams of investment managers and continue to perform as per their respective investment mandates.
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
• Franklin India Income Opportunities Fund

Further, they stated-

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.

Franklin Templeton India Closed 6 Debt Funds – Is it right?

It all started with when FIIs started to withdraw from these funds. Because of this, fund manager was forced to sell. However, as the underlying debt instruments are low rated, no buyers to these papers. To meet the redemption pressure, fund managers borrowed the money as stipulated under SEBI Regulation. However, they can’t borrow beyond the limit.

Hence, they decided to close these funds.

Procedure to close a Mutual Funds

Can they close the funds on thier own UNILATERALLY? NO.

As per the SEBI Regulations, they can’t wind up on their own. The rules are as below. You can refer to this SEBI Regulation on winding up.

(1) The trustee shall call a meeting of the unitholders to approve by a simple majority of the unitholders present and voting at the meeting resolution for authorizing the trustees or any other person to take steps for winding up of the scheme:
Provided that a meeting of the unitholders shall not be necessary if the scheme is wound up at the end of the maturity period of the scheme.

(2)(a) The trustee or the person authorized under sub-regulation (1) shall dispose of the assets of the scheme concerned in the best interest of the unitholders of that scheme.
(b) The proceeds of sale realized under clause (a), shall be first utilized towards discharge of such liabilities as are due and payable under the scheme and after making appropriate provision for meeting the expenses connected with such winding up, the balance shall be paid to the unitholders in proportion to their respective interest in the assets of the scheme as on the date when the decision for winding up was taken.

(3) On the completion of the winding up, the trustee shall forward to the Board and the unitholders a report on the winding-up containing particulars such as circumstances leading to the winding-up, the steps taken for disposal of assets of the fund before winding up, expenses of the fund for winding up, net assets available for distribution to the unitholders and a certificate from the auditors of the fund.

(4) Notwithstanding anything contained in this regulation, the provisions of these regulations in respect of disclosures of half-yearly reports and annual reports shall continue to be applicable [until winding up is completed or the scheme ceases to exist].

Hence, closing is not UNILATERALLY from the fund houses. However, to stop the further redemption pressure, the Franklin Templeton India followed the process of-

  1. No further sale/redemption allowed.
  2. Nav will be declared daily.
  3. They will start selling all securities and release amounts to investors.
  4. No Asset management fee will be charged on these schemes until winding up is over.
  5. Investor money will be stuck until the time everything is paid out.

What investors of Franklin Templeton India Mutual Fund investors do?

# Those who are the investors of these funds

Those who are the investors in these funds have no option but to wait for clarity. Let the mutual fund company as per regulation call for unitholders meeting and follow the process. As of now, you are not allowed to withdraw or invest (who wish to invest??).

Getting money is not so easy. Because the fund manager can’t sell the holdings in the current situation. Hence, getting money may be in a phased manner as and when the fund house receives the sales proceeds of the underlying papers.

Valuation of your holdings may be as per the sales proceeds what the fund manager do.

It is premature to assume anything at this juncture.

WHEN YOU WILL GET BACK THE MONEY?

It is hard to say. Because as currently the redemption is stopped. There is no further pressure on the fund manager to manage the sudden redemption. However, I think in a phased manner as and when they are able to sell the underlying bonds, they may return you back.

HOW MUCH YOU WILL GET BACK?

It is obviously not as of today’s value!! The reason is that they are holding high risky and illiquid bonds. Hence, selling them as per the current valuation is the toughest task. Hence, they have to sell those securities at the discounted price (if they find any suitable buyers). As per that valuation, they may pay you the redemption.

However, as I said, let us wait for clarity.

# Those who are not the invetors of these affected funds

If you are the debt fund investors of this AMC, then I suggest you to move to some other funds of your choice. However, if you are an equity investor of this AMC, then no need to worry.

To a certain extent, I feel they did it right in protecting the existing investors. However, they lost the game of TRUST. In India, where Mutual Fund penetration (especially Debt Funds) is low, such actions completely erode the trust of the investors.

Because many advisers sell debt funds to retail investors as an alternative to typical Bank FDs, RDs, or other traditional debt instruments.

I think the fall of Franklin Templeton India’s debt story started long back when they took an undue risk in the above-said funds just to generate a certain high return.

Incidents of default or downgrade are not new with respect to Franklin Templeton India’s Debt Funds. However, as per my view, closing debt funds is the first of its kind in India.

It is a big lesson to all those investors who always have a BLIND BELIEF that Debt Funds are SAFE. At the same time, it is the biggest warning to the adviser community and to AMCs also before pushing such products in the name of HIGH RETURNS or by comparing the traditional products like FDs or RDs.

Conclusion:-In my view, considering the future risk, Franklin Templeton India did the right thing (whether it is permissible under SEBI rules or not we have to check it). However, in this game, they completely lost the faith of Indian investors, especially of those who trusted debt funds as an alternative to traditional debt instruments.

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30 Comments

  1. FTMF is taking the stand that they had taken this shuttering in the interest of investors. The fact of the matter is they ran out of bullets and raised their hands and then they started to justify their action. What really happened is they came to the point where they are unable to service the redemptions and if word would have been out that redemptions were not getting honored, whole of FT India (Equity+Debt MFs) could have wiped out. To save their jobs and company, they took this action for their own selfish purpose and definitely not in the interest of investors. COVID scenario has been used as perfect disguise.

    Reply
  2. Last night a message from its President of Franklin was forwarded answering some common investor questions and going through them found same arrogance of the concall. I have a feeling that rot is deeper and COVID gave them good disguise. No facts and figures talked and only the general talk during the crisis time really irritated me.

    There are so many Ultra Short Funds are there in the market from various fund houses and why only redemption pressure is seen in FT UST?. None of the UST AUMs were dropped in this manner but why Franklin USBF and all its debt funds? RBI gave EMI moratoriums and people spending only on essential groceries, cash positions in banks swelled and here we are seeing the reverse trend of rushing into redemptions. Obviously people are not buying any RE/autos/electronics during this lockdown and why these funds alone gets into redemption pressure beats me.

    Luckily there are no defaults from any of the invested papers and even while, these guys couldn’t manage the cash flows?. What could have happened if there are any defaults is anyone’s imagination.

    Didn’t understand the logic behind creating segregated folios even before the maturity of vodafone/idea papers?. What was the hurry to create segregated folios 6 months in advance of maturity in anticipation of default?. Also some other fund houses too had exposure to these papers and they didn’t do any such thing. Franklin created such a big fiasco that they are so concerned about investors money and giving pat on their back for such thoughtful action.

    There are some allegations that even low quality papers are invested at lower interest rates (like AA- papers invested at 8.3% yields that too from first timers ) and that leaves lot of suspicion about fund manager’s competency and also possible corruption angle?

    There is still no clarity on how much they have borrowed and we are seeing different figures and Franklin yet to publish those figures officially?

    Reply
    • Dear KV,
      Thanks for airing your views. Sadly Franklin considered all its debt funds as credit risk funds with various maturities to match with SEBI’s Fund definition.

      Reply
  3. Sir, what about my upcoming SIP in FILD fund, should I stop it by cancelling the biller in my bank account or it will be done automatically, I was doing SIP of 3k every month to low duration find.

    Reply
    • Dear Praful,
      As the SIPs/STPs/SWPs are already cancelled, even if the amount is deducted, it will be reversed. Hence, no need to worry.

      Reply
  4. I had withdrawn all most all MF investment long back due need arise, thank god. Now the situation is getting worst day by day and this kind of funds closure surely impact in large scale across MF industry. Mutual fund sahi hain ad now will become sahi nahi. Majority of investors are retail investors and they get affected each time and every time. There should be some protection mechanism and clarity on such investments to retail investors particularly.
    Anyway I hope they should be able to sell the underlying asset and return back the money to investors. Thanks Basavaraj for this article and insight views.

    Reply
  5. Really worried . Have few lakhs investment in Franklin Low Duration & Ultra Short Term.
    Since you have mentioned that we need to wait for the update from Franklin Templeton will do so
    But really want to thank you for the post
    Fingers Crossed ill get my money back

    Reply
  6. Hi. I have good amount in Icici liquid, overzicht and balance fund. Also in L&T small cap, ABSL money market funds. Should I switch over to bank FDs? Was under impression liquid, overzicht aDe very safe.

    Reply
    • Dear Narayanan,
      No need to panic. All Liquid Funds and Overnight Funds are not like that. Take a call based on your financial goals and your risk appetite.

      Reply
  7. What is your recommended debt funds in covid 19 situation to keep emergency fund ? Should we keep in overnight fund or liquid funds ? If yes then which one?

    Reply
    • Dear Laxmikant,
      I always followed the strategy of keeping 1/3 in Savings Account, 1/3 in Bank FD of a year (using internet banking) and another 1/3 either in Overnight Funds or Liquid Funds. Do remember that all liquid funds are not SAFE.

      Reply
  8. Dear sir, I have been investing 12k through SIP in franklin balanced and franklin india equity funds. I’m already in a loss of around 1 lacs out of 5 lacs. Please suggest me sir whether I should withdraw or can go ahead. Thanks!

    Reply
    • Dear Sharath,
      As I already pointed in the above post, except for 6 funds, the rest of the funds will continue. As both of your funds are in equity and due to market conditions, they may be down. It is hard for me to say what to do. Because I don’t know the reasons behind your decision to invest in these funds.

      Reply
  9. How to retrieve money invested in ultra short bond fund.should we have to claim a refund from their site.do we get now?

    Reply
    • Dear Srivalli,
      As of now, redemption or purchase is not allowed in the affected funds. They have to follow the winding-up procedure and once they realized the sales proceeds of underlying assets, then they can give you back the money.

      Reply
  10. Dear Basu

    I am completely shocked on reading this news. I have quite a big sum invested in Ultra Short Bond Fund.
    Please let me know the meaning of ‘winding-up process’ and will the investors get back their invested money? How suddenly they can ‘close’ and ‘run away’ with investor’s hard earned money? Can’t SEBI take any action and ask them to return the amount investor’s have invested? What is your frank opinion?

    Reply
    • Dear Bhuwalka,
      They will call the investors meeting to take a permission to wind up. However, the valuation of how much you will get back in return is a BIG QUESTION. As per regulations, they can’t close the fund UNILATERALLY.

      Reply
  11. Sir , i had invested my saving in franklin debt funds because of it’s good track record. What will happen sir now ?

    Reply
  12. What will happen with invester money. How will get money

    Reply
  13. sir I have surplus amount parked in reliance liquid fund. should I shift bank FD?

    Reply
    • Dear Bahnimay,
      This is affected to Franklin AMC but not with Reliance AMC. However, rather than taking a knee jerk reaction, check the underlying portfolio and take a call. I suggest you Quantum Liquid Fund or Parag Parikh Liquid Fund.

      Reply
  14. Whether we will get money or not ? If yes when do you think customers will receive & whether it will receive in full?

    Reply
    • Dear Vishal,
      You will get back the money but surely not as of today’s value.

      Reply
  15. Is it safe to remain invested in overnight funds of Franklin and Aditya birla?

    Reply
    • Dear Suresh,
      Overnight Funds not impacted. Hence, no need to worry. However, AMC wise, I suggest you to avoid.

      Reply

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