Franklin Templeton Mutual Fund announced the closure of six fund schemes through a letter dated April 23. These schemes were all yield-based or debt-based, and impact assets worth ₹26,000 crores. Franklin Templeton cited the ongoing COVID-19 crisis, and the imposed lockdown for it making such a decision.
Debts funds are considered to be low risk funds as compared to their peers in asset classes such as equity. Franklin has stated in a press release that other than these funds, all funds across debt and equity would not be affected.
BOOM tells you 5 things you need to know
Which funds have shut?
The following six funds have been discontinued by Franklin Templeton:
- Franklin India Low Duration Fund
- Franklin India Ultra Short Bond Fund
- Franklin India Short Term Income Plan
- Franklin India Credit Risk Fund
- Franklin India Dynamic Accrual Fund
- Franklin India Income Opportunities Fund
These funds are known as credit risk funds, as they invest in lesser-rated corporate bonds that give returns at higher rates of interest but with a greater risk exposure, as compared to better rated corporate bonds or government bonds. Speaking to BOOM, Neville Poncha, founder of IntelX Money said, "These are the funds that invest in slightly riskier paper, this is not the 'AAA' rated paper that people think of when they invest in debt papers."
Why have the funds been discontinued?
The funds have shut as Franklin Templeton began facing redemption pressures due to the ongoing COVID-19 pandemic, and the lockdown imposed by the government toc counter the spread of the virus.
"There has been a dramatic and sustained fall in liquidity in certain segments of the corporate bonds market on account of the Covid-19 crisis and the resultant lock-down of the Indian economy which was necessary to address the same. At the same time, mutual funds, especially in the fixed income segment, are facing continuous and heightened redemptions", said Franklin Templeton in its release.
Redemption is when investors withdraw their units in a mutual fund, along with accrued gains/losses.
Will investors recover their money?
Investors are expected to get back their investments from the funds on a staggered basis.
Instead of resorting to a distress sale, the fund will compensate its unit holders after the maturities under its management mature. In its press release, Franklin has stressed on maintaining value.
"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", said their official press release.
Mutual fund association AMFI assures investors
The winding up of the less-risky and relatively safer debt funds in India has raised concerns of the health of investments in debt funds. The Association of Mutual Funds in India (AMFI), the non-profit organisation of all Securities and Exchange Board of India (SEBI) registered mutual funds rushed to assuage concerns about the health of debt and credit risk funds.
"The assets under management of these six schemes constitute less than 1.4% of Indian Mutual Fund industries' aggregate AUM as on March 31, 2020.", said the AMFI. The AMFI chief executive, NS Venkatesh, added that credit risk funds are sufficiently well equipped with liquidity and remain viable investment options.
What can investors now do to be safe?
"Look at your portfolio, look at your debt which could be in your hybrid funds. There are a lot of safe funds available today. Don't just be blinded by past track record and past return, look at the future, and there are many safe investments in mutual fund space too", said Poncha to BOOM.
"Liquidity is something that is challenged first in such a situation", said Vishal Thakkar, Co-founder of ConTeTra Universal, to BOOM. "At this point, be cautious and hold on to your liquidity, for at this point, it is something that will save you and keep your head above the water."
See the full interview here.