Franklin Templeton Mutual Fund (FT MF) will be launching a balanced advantage fund – its first mutual fund scheme in around two-and-a-half years since it decided to wind up six of its debt schemes in April 2020.
The new fund offer (NFO) will be open for subscription on August 16 and close on August 30.
The Balanced Advantage Fund is the largest hybrid category in the MF industry, accounting for investor assets worth Rs 1.7 trillion. To be sure, there are 25 schemes already in the category.
Typically, a BAF shifts exposures between equity and debt, depending upon the valuations of the stock markets. When equities are over-valued, the fund reduces equity exposure, while at the same time increasing debt exposure. It does the opposite, when equities are under-valued.
FT MF went through a difficult period after it shut its six debt schemes due to lack of liquidity in debt markets. Some investors initiated legal process against the fund house. While the schemes have now largely returned the funds to the investors, the legal proceedings have not yet concluded.
The legal battle over whether Franklin Templeton crossed the line and took undue risks is still on. After the capital markets regulator, Securities and Exchange Board of India (SEBI), slapped hefty fines on the fund house and its senior officials and asked it to return the fund management fees it had earned in the months leading to the winding up, Franklin Templeton filed an appeal at the Securities Appellate Tribunal (SAT).
In a recent interaction with Moneycontrol, FT MF's former president Sanjay Sapre had pointed out that Franklin Templeton India had taken a conscious decision to not launch any debt funds till its court cases are resolved. On the equity side, he had added, the fund house is present in almost all the important categories, except the new-age index and exchange-traded funds. One important category that the fund house wasn’t present in, was a balanced advantage fund.
That void will get filled up on August 16.
How the fund will work?
The fund will follow an investment model using price-to-earnings and price-to-book multiples to determine the expensiveness or cheapness of stock markets, and accordingly increase or reduce equity exposure.
The fund's equity exposure are likely to be in range of 80-85 percent on the higher side and 15 percent on the lower side.
In the current market environment, the fund house's investment model suggests 53-54 percent equity exposure.
If the net equity allocation falls below 65 percent (the minimum requirement for fund to get preferential equity taxation), the difference will be met by arbitrage allocation.
The exposure to large caps will range between 60-85 percent of the equity corpus, while exposure to mid- and small-caps would be in the range of 15-40 percent.
On the debt side, the fund will invest in higher-rated debt securities on the credit risk curve, but within that the fund will take interest rate views.
As Anand Radhakrishnan, managing director & chief investment officer – emerging markets equity - India, Franklin Templeton, explained, "For example, the portfolio duration of the fixed income portfolio of our equity hybrid fund has moved from 2.5 years to 5.5-6 years, which shows that the fund manager has taken the view that the interest rates are peaking and now maybe is a good time to increase the duration of the fixed income portfolio, without going down the credit curve."The fund will make its debt investments in government securities and corporate bonds.