Monday, May 4

Franklin Templeton closes six debt funds: What does it mean for the Investors?

The Covid-19 pandemic is impacting a lot of businesses, and the liquidity in the bond and stock markets have dried up. In a latest move, Franklin Templeton Mutual Fund, one of the top fund houses in India, has closed down six of its open-ended debt funds, w.e.f April 23. 

The Six Fixed Income Mutual Fund schemes are:

 1. Franklin India Low Duration Fund (FILDF)
 2. Franklin India Dynamic Accrual Fund
3. Franklin India Credit Risk Fund,
4. Franklin India Short Term Income Plan
5. Franklin India Ultra Short Bond Fund
6. Franklin India Income Opportunities Fund (FIIOF)

Although Franklin Templeton has announced that it will sell the underlying securities of all these funds and pay off their investors, a lot of retail investors are still worried.
The existing investors are concerned and curious to know when they will get their money back. The investors of other mutual fund schemes are also confused about whether to exit or stay put.
“The extension of the lockdown has heightened redemption volumes and reduced inflows to unsustainable levels. The schemes even resorted to borrowings within permissible limits, in line with market practice to fund redemptions. But given the situation, we felt that it would not be prudent to leverage the schemes further,” says Sanjay Sapre, president of Franklin Templeton (India).
The equity markets across the globe have crashed due to the COVID-19 pandemic and lockdown. The India stock and bond markets have met the same fate and have collapsed drastically. Foreign investors are selling their equities and debt securities in Indian markets. Besides, the economic slowdown has impacted many big and small firms across the globe, including India. It has shattered the confidence of investors who are staying away from both equity as well as debt markets.

The Franklin Templeton funds are also receiving substantial redemption requests due to uncertainty in the markets. In such a scenario, Fund Houses either need to use their cash reserves to meet the redemptions, or they have to sell their underlying scrips. Under such circumstances, Templeton felt that it would not be prudent to leverage the schemes further, and they decided to discontinue with six funds.

Impact of winding down of the six Franklin fund on the investors?


The President of Franklin Templeton has assured the investors that their investment is safe and would be paid off in a staggered manner. Since the company was unable to meet the redemption pressure, and it did not want to sell off the investments at the current low prices. And so the management took this decision to wind up the funds.

Investors will have to wait almost as long as the duration of the underlying scheme as they would not be able to withdraw their money immediately or on their own.
For instance, Macaulay duration of Franklin India Income Opportunities Fund as on March-end was 3.22 years. It means that the investors of this fund need to wait for this much of period to get their invested money back.
“Since investors in some of these funds had invested for the long term, it shouldn’t matter if they have to wait to get their entire proceeds back because it will take some time to liquidate all the underlying holdings,” Sapre said.

Generally, the shorter the duration of the portfolio, the faster the scheme is likely to be wound up, and the investors can expect payment accordingly.

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