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.
(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-
- No further sale/redemption allowed.
- Nav will be declared daily.
- They will start selling all securities and release amounts to investors.
- No Asset management fee will be charged on these schemes until winding up is over.
- 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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