As US Fed and RBI look ahead, Franklin Templeton wants to capture lost space in debt funds

The fund house believes that inflation and growth are progressing in a balanced manner with stability over macroeconomic conditions.

After a year of joining Franklin Templeton India Asset Management Co (AMC), Rahul Goswami is ready with a rejuvenated fixed-income side of the fund house.

He is the CIO, India Fixed Income, Franklin Templeton.

On August 19, the AMC launched its first-ever debt fund, since the abrupt winding-up of six of its debt schemes in April 2020, on the back of COVID-19, which had led to a liquidity crisis.

Goswami believes that the short and medium tenure on the interest rate curve is attractive on a risk-adjusted basis and funds across maturities are positioned accordingly, against their respective mandates.

The fund house believes that inflation and growth are progressing in a balanced manner and macroeconomic conditions are stable, and the Reserve Bank of India (RBI) would prefer to ensure sustainable price stability and inflation moving towards the target on a durable basis.

According to the fund house, the resilient growth and moderating inflation, with slight unevenness, are what prompts the RBI to think so.

“We think the RBI would remain vigilant and ensure that inflation expectations do not spill over to the broader components and derail the progress made so far. In our assessment, the RBI may find itself in a position to ease monetary policy from the current levels in H1FY25. Also, we expect that the rate cycle may not be deep in India,” Goswami said.

“Growth indicators continue to remain positive and inflation remains within range, providing a salutary effect to the economy. However, the Monetary Policy Committee (MPC) would be cognizant of the global headwinds and economic situations. We expect the MPC to keep rates unchanged in the near future,” Goswami said.

Franklin Templeton's first fixed-income fund since the April 2020 fiasco, Franklin India Ultra Short Duration Fund, will invest in debt and money market instruments such as non-convertible debentures (NCDs), bonds, certificates of deposits, commercial papers, treasury bills and government securities, so that the Macaulay Duration of the portfolio is between three and six months.

More debt funds would be coming up soon. To fill the gaps in its offerings, the fund house will soon launch Franklin India Medium to Long Duration Fund, which will invest in debt instruments, so that the Macaulay Duration of the portfolio is between four to seven years. It will be a fund with a relatively high interest rate risk and relatively moderate credit risk.

Macaulay Duration captures the time taken by an investor to recover the money invested in a bond.

The fund will invest across debt instruments, like government bonds, corporate bonds and money market instruments, with an indicative investment horizon of three years and above.

“This product would be suitable for any investor looking at a slightly strategic nature of investment in the fixed-income space. This is a product which fits beautifully into that space where you can look at fixed-income funds as strategic investments as well. It will look to diversify your portfolio over a long-term horizon. We will look to invest in high-grade, quality investment assets like sovereign debt, state development loans, AAA-rated bonds issued by PSUs, etc.,” Chandni Gupta, Vice President and Portfolio Manager, Franklin Templeton India, said.

Gupta would be the co-fund manager of Franklin India Medium to Long Duration Fund, along with Anuj Tagra, Vice President and Portfolio Manager, Franklin Templeton India.

The New Fund Offer will open on September 2 and close on September 16.

On April 23, 2020, Franklin Templeton India Mutual Fund shocked investors when it announced the winding up of six debt funds — Franklin India Ultra Short Bond Fund (FIUBF), Franklin India Low Duration Fund (FILDF), Franklin India Short Term Income Plan (FISTIP), Franklin India Income Opportunities Fund (FIIOF), Franklin India Credit Risk Fund (FICRF) and Franklin India Dynamic Accrual Fund (FIDAF).

Franklin Templeton has returned Rs 27,508.14 crore, or 109.09 percent of the assets under management (AUM), to investors from the six schemes that were closed due to a surge in redemptions during a liquidity crisis in the debt market, triggered by COVID-19.