The decision is restricted to six funds which, the company said, 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.
In an unprecedented decision, Franklin Templeton Mutual Fund has shut six of its open-ended debt funds, effective April 23. All these schemes followed the high-risk, high-return credit risk strategy. The fund house will now sell the underlying securities of all these funds over time and pay off their investors in a staggered manner.
“Due to the on-going novel coronavirus, or COVID-19, pandemic, liquidity in the bond market has dried up. Yields of debt securities have risen sharply and that has materially diminished the abilities of companies to service their debt. Mutual funds have also been getting a lot of redemption requests. We felt it best under these circumstances to wind up these funds and return the money to investors,” Sanjay Sapre, President, Franklin Templeton – India, said.
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- Franklin India Low Duration Fund (FILDF),
- 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 (FIIOF).
Ever since the COVID-19 was declared a pandemic in early March, equity markets all over the world as well as in India and bond markets here have collapsed. Foreign investors sold equities and debt securities in Indian markets because back home, companies faced a liquidity crunch. The massive sell-off in debt markets led to a crash in prices and rise in yields.
Further, as economies got impacted by the slowdown caused by novel coronavirus, bankers stopped lending, especially to companies with weaker credit ratings. The demand for debt scrips, especially lower-rated companies fell. This led to a crisis of confidence as investors stayed away from both equity as well as debt markets, leading to a drastic fall in volumes.
There are apprehensions in the market that due to the slowdown, there could be more defaults. In uncertain and fearful times, investors become risk averse and stay away from low credit rated companies, long considered the playing ground for Templeton funds.
Meanwhile, credit risk funds like the ones run by Templeton continued to see redemption. To meet redemptions, the fund house either dips into its cash reserves or sells its underlying scrips. For Templeton, Sapre said, even that wasn’t enough.
“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,” he explained.How soon will investors get their money back?
As the schemes have been wound up, investors in these schemes will not be able to withdraw their money, immediately or on their own. Instead, they will have to wait almost as long as the duration of the underlying scheme.
For instance in Franklin India Low Duration Fund, the Macaulay duration as of March was 1.2 years. In simple words, it means the weighted average effective time period to get the cash flows back. Its investors will therefore have to wait around a year and 73 days to get all their money back from this scheme.
Similarly, Franklin India Income Opportunities Fund’s Macaulay duration as of March-end was 3.22 years. This means that FIIOF’s investors will have to wait for close to three years and 80 days to get all their 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.
He hopes the pandemic would come under control soon and the markets revive. In such a scenario, he added that there is a possibility of early liquidation of portfolios, in which case investors may get their monies sooner.
In the meantime, Templeton will keep trying to liquidate its portfolios as much as it can. Of the money it receives, Sapre has assured that the fund house will keep paying all investors, big or small, proportionately and in instalments. In short, you will have to wait for the fund house to keep coming to you with bits and pieces of your redemption proceeds, periodically. There is nothing much you can do in the interim.
Sapre said the fund will not charge asset management fee with effect from April 24, the winding date, for as long as it takes for them to redeem the funds completely. Meanwhile, the segregated portfolios of these schemes will continue independently. Sapre said that these segregated portfolios that were created last year-and-a-half back for some of the schemes’ illiquid underlying securities, where companies had defaulted, will continue to try and recover these investments too. “As and when we get back our money from these companies, the segregated portfolios will pay investors who were eligible to receive the units,” he stated.What happens to your SIP and STPs?
Since Templeton has stopped subscriptions and redemptions, your systematic investment plans (SIP) will stop automatically.
If you had enrolled for systematic transfer plans (STP; a facility wherein you invest a lumpsum in a debt fund, preferably a low risk one, before you transfer equal amounts once a week or month in an equity fund of your choice), your money is stuck. Your STP has just gone for a toss as the transfers to your equity funds will now not happen.
If you still want to go ahead and invest in the equity fund of Templeton, you will have to arrange for a fresh pot of money. Your Templeton debt fund will pay back your money, but as and when it gets to sell its portfolio and realise the money.
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