Franklin Templeton India, one of the largest fund houses in the country, said it will shut six debt funds that carried credit risk. The winding up of these credit funds effective from April 23. Below are answers to seven important questions on the action by Franklin Templeton, based largely on Tweetstorm launched by Manoj Nagpal, Moneycontrol business head - B2C revenues.
Q. This is shocking. Why did Franklin Templeton India decide to shutter these funds?
Indeed. Unprecedented is how Franklin Templeton termed the decision. The fund house has squarely blamed the coronavirus pandemic for the decision. “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,” Franklin Templeton declared in a statement on April 23.
India’s financial sector is under intense strain, grappling with a crushing liquidity crisis. Due to the uncertainty, investors began to panic and took to redemption, especially in credit risk funds such as the ones run by Franklin Templeton. To meet redemptions, a fund house typically dips into cash reserves or sells underlying scrips. Even that wasn’t enough, according to Templeton, which forced it to take the decision to wind up the six funds.
Q: Can you name the six funds?
A: Sure. Here goes:
- 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
- Franklin India Income Opportunities Fund
Q: Can you elaborate?
A: Of course. These six schemes put together are estimated to have an AUM of Rs 28,000 crore. This entire AUM is now stuck. You cannot redeem the funds. This includes purchases or redemptions through Systematic Investment Plans /Systematic Transfer Plans/Systematic Withdrawal Plans.
Simply put, you cannot withdraw the money you have invested.
Q: Will Franklin Templeton ever open these schemes?
A: No, the schemes are wound down. That means they will never open again. It will work like a segregated portfolio. Look at it this way: the day the fund houses get any interest or maturity from any of the holdings, it will distribute to investors. Additionally, as and when the fund house can get a fair value of it’s investments in the secondary market, they will do that too.
Q: Fingers crossed. Tell me more. A: As and when the underlying portfolio instruments mature or the scheme receives the money back (in case interest or defaults etc), Franklin Templeton will pay it back to you. Quoting what Templeton said in a note on April 23: “The trustees, with the assistance of the investment manager, will proceed with orderly realisation and liquidation of the underlying assets …” The catch is that Templeton will distribute proceeds to unitholders only after it discharges liabilities of the funds. But note that these payments — when they happen — will be staggered. As Templeton said, impacted investors should immediately contact their advisors to discuss financial and tax implications.
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