What has Franklin Templeton Mutual Fund done?
Franklin Templeton Mutual Fund has decided to wind up six debt funds with combined assets under management of almost ₹26,000 crore. It said this had been done on account of illiquid, low-rated instruments in their portfolio. The schemes that have been shut 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.
Why was the fund house forced to take this step?
The fund house said that it had decided to wind up the schemes to preserve the value, at least, at the current levels, for, the value was getting eroded due to a combination of redemption pressures and mark-to-market losses following the lack of liquidity on account of the COVID-19 impact on markets. Franklin also said that some of the schemes that were closed had direct exposure to high-yielding securities across the rating spectrum but the instruments rated below ‘AAA’ were the most impacted.
What does it mean for investors?
Investors will not be able to redeem their investments for the time being as the fund house has barred both purchases and redemptions. Franklin said it would endeavour to return the ‘maximum value possible’ to the investors. Further, while the net asset value of the schemes would continue to be published, investors will not be charged any investment management fee, going forward. Franklin said it would proceed with the liquidation of the assets and the funds with the shortest duration would be liquidated at the earliest. It has, however, added that selling all the securities in the market immediately would hit the valuation hard and hence, it would evaluate the opportunities once the COVID-19 situation improved and liquidity returned to the market.
Will this hit other fund houses or schemes?
While this would definitely impact investor sentiment and debt schemes could see a spurt in redemptions, the mutual fund industry has been quick to point out that the Franklin Templeton issue was a one-off instance and not an industry-wide phenomenon. The Association of Mutual Funds in India (AMFI), the industry body of fund houses, has said that credit risk funds — the worst affected of the lot — constituted a mere 5% of the overall debt schemes.
Also, a bulk of the assets were rated at least AAA or above. AMFI also said while regulations allowed mutual funds schemes to borrow up to 20% of their assets to meet liquidity needs for redemption/dividend pay-out, only four funds, out of a total of 42, had borrowings aggregating to ₹4,427.68 crore.
