Franklin India shuts down 6 debt funds

Recently we have received a news that Franklin India has decided to shut down the following 6 debt funds Franklin India Low Duration Fund, Franklin India Ultra Short Fund, Franklin India Short Term Income Fund, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund, and Franklin India Income Opportunities Fund. That means new investments or redemptions/withdrawals from these funds will not be possible from 24 April 2020.

Franklin India said that these debt funds were facing redemption pressure i.e. too many investors are trying to redeem from these funds and thus liquidity has been the problem for them. Now because of this pressure, Franklin has to sell their assets at very poor prices. Now shutting down these funds will allow Franklin to sell assets gradually at better prices.

Now, what will happen to existing investors, including me. I have invested around $400 in Franklin India Ultra Short Fund. I have invested in this fund to have some debt exposure because I do not want to invest only in equity funds.

Today I dot an email from the President of Franklin India, Sanjay Sapre which gives all the information about why Franklin decided to shut down the funds and what will happen to the investor money.

Dear Investor,

I am personally writing to you today, to address some immediate concerns created by some well-intentioned but factually incorrect reporting across various media channels. Let me provide some clarifications point by point:

1: Reported: Winding up of the schemes means that my money is lost

Fact: This is factually incorrect. We have communicated the reasons and market circumstances that led us to take this extremely difficult decision which was taken purely to protect value for our investors. As the schemes liquidate portfolio holdings subject to market conditions, receive coupon payments and scheduled maturities, the Trustees will start to return monies to investors at the earliest instance in compliance with regulation 41(2)(b) of SEBI (Mutual Fund) Regulations 1996.

2: Reported: The schemes invested in risky, unrated papers

Fact: The schemes followed a consistent investment strategy of investing in investment grade papers across the credit rating spectrum, that is to say, from AAA through to A rated papers. This strategy served the schemes and its investors well till recent times. The schemes were able to generate significant cash flows even during the last 6 months which were more turbulent times for the credit markets. For example, the schemes were able to generate significant cash from the portfolio holdings, a majority of that from papers rated AA and below.

3: Reported: The liquidity problem is not related to the Covid-19 pandemic

Fact: These schemes followed a consistent strategy of investing across the credit rating spectrum and have done so for many years, and across multiple market cycles. The schemes have been able to manage through these cycles and provide daily liquidity. Many of these schemes have been in existence for more than 10 years with a similar strategy. The current Covid-19 pandemic created a severe market dislocation particularly for the types of investments that these schemes hold, though the issue of lack of risk appetite, reduced volumes and illiquidity for corporate bonds was a broader market issue. The inability of the schemes to meet daily redemptions was a direct result of the market situation created by the COVID- 19 pandemic as well as the extended lock-down.

4: Reported: The schemes will not be able to return investor monies for an extended period of time

Fact : Each /scheme has its own maturity profile and in general, shorter duration schemes will be able to return monies to investors faster. The schemes will receive regular coupon payments and maturities. In addition, the schemes will explore all opportunities to monetize the underlying assets in the portfolio, without resorting to any distress sales, such that it can return investor monies at the earliest possible time. It will be the endeavor of the schemes to return these monies well in advance of the maturity dates of the underlying securities.

5: Reported: We should be redeeming our monies from all other Franklin Templeton schemes as these could also be wound up

Fact : The decision to wind up our suite of six yield-oriented schemes was an extremely difficult one and taken only to protect investor interest. It was not a situation in which we hoped to find ourselves. We also recognize this has impacted liquidity for our investors but was necessary in order to preserve value for our unitholders.

Our other fixed income schemes which are open for subscription and redemption, primarily invest in highly liquid securities such as Government Securities, AAA rated bonds or other cash and cash equivalents. These portfolios have the necessary ability to generate liquidity in order to meet redemptions. We have already generated a significant amount of liquidity in these portfolios to meet any redemption requests we may receive.

Our equity schemes remain unaffected and continue to be managed by our experienced and tenured team based in Chennai in line with their investment mandate and fund management philosophy.

6: Reported: Franklin Templeton is winding up its business in India

Fact : Franklin Templeton has been an early and patient investor in India. We have worked to build a long-term business in India over our 25+ year history here. This is also reinforced by the fact that over 33% of our global workforce is based in India. As affirmed by our global CEO, Jenny Johnson, Franklin Templeton’s commitment to India remains steadfast. We are committed to doing all we can to return monies in the schemes that are wound up at the earliest to investors, and to regain your trust in our brand.

So the money is actually not lost and Franklin will pay back its investors as and when it sells papers or they mature. Also the Association of Mutual Funds in India (AMFI) in a press release has assured investors that their debt fund investments are safe. The investors will not be able to get their investments back immediately but will get it back over time. The timeline is not clear yet.

Now the real question is where will you keep your money because Debt Funds seemed like the safest mutual funds.

Posted Using LeoFinance