Franklin Templeton schemes closed
This is not the first time that Franklin Templeton India has closed its schemes. They did it long ago – that time they closed their PMS schemes. Issue was non-performance or too small a business. Now what they have done is they have closed 6 of their debt funds. Normally people keep money in debt funds (recommended by people like me too) in debt funds to POSTPONE THE TAXATION – you pay tax only when you withdraw not on a yearly basis like a bank fixed deposits.
Which are the funds that FT has closed down?
Low duration ,(3 years)
dynamic accrual,(3 years)
credit risk (4 years),
short term income plan, 3.5 years
ultra short bond fund, (1.5 years)
income opportunities fund.(5 years)
the numbers given in the bracket is what I expect to be the time frame for redemption. A portion of the money will come in 2021, 2022, 2023, 2024.
Their MD Sanjay Sapre has said “Covid-19 and other reasons..have put pressure and hence this decision”.
What does it mean – it means that you will get the money invested in these funds as and when they sell the bonds. This makes some sense because if they had sold it today they would not have got the NAV that is mentioned. It would have been a distress sale and you would have got hurt.
Cutting out the jargon what it means is – say in Franklin India Ultra short bond fund – in which we deploy money to withdraw in say 1 year – we will be able to get the money AS AND WHEN they sell the bonds. The duration of this fund is about 6 months, so you should be able to get it in 6 months.
Will the NAV be published on a day to day basis? yes, SEBI requires that and so it will be done.
Could the players in the market have known this will happen? Very difficult for anybody – not even the fund manager would have expected a run on their funds, but it is a part of behavior finance.
If one needs money in a rush what can be done? Nothing much I guess, but given Indian conditions some NBFC may offer you some liquidity at a damn deep discount. Is this possible? I am not sure about the legality, but I guess it will be on offer.
What is the implication for other schemes of FT?
could there be a run on other debt schemes?
what could be the implication for debt schemes of other mutual funds?
all 3 questions must be in the minds of the CEO and CIO of other mutual funds also.
Honestly none of them will have an answer for this today.
What should you do?
Just accept the delay in the payment. Yes the fund manager took a lot of risk – a Sehwag and not a Rahul Dravid – if you may. In case of longer duration funds – with say 3 years to go, you would have anyway had a mindset of waiting, so you will have to wait. I do think the longer duration funds will actually see a faster turn around. As they have closed the fund, FT will not be a distress seller – that itself means the downside risk is REDUCED, not ERASED.
Why did this happen?
The debt markets in India are not well developed – unlike the equity markets. So if you have to sell 100 Infosys or 100,000 infosys you go to the same market which does a price discovery. Not true for debt instruments. So if I have say an ABC paper of issued at 10%p.a. I will not be able to sell it at a discount. Let me explain. If I had bought this paper at Rs. 1000 and was paying me 10% per annum. Then the risk in this paper increased and fresh paper was issued by this company was not at 12% pa. – so the bond which I had bought would fall to say Rs. 80 (I am simplyfying it, in real life it is more complicated), I should be able to sell it at Rs. 80 – and take a Rs. 20 loss. Sadly the secondary market for such paper is non existent. So I am stuck with such paper till maturity. Thus the risk is heightened. Now when the risk increases the interest rate increases, the rating falls, and the bond becomes illiquid.
If you noticed in the past 3-4 weeks companies have gone to court saying they can’t be downgraded and that they should be allowed to retain the rating. Another company has gone saying they can’t pay interest or the principal !! Hopefully as time goes by some of these problems will be solved.
The debt market will not be the same again.
This too shall pass.
Geo
taking the example of Franklin Ultra Short Bond, the definition of the fund says debt instruments with 3-6 months maturity. In the article you say it will take approx 1.5 years to get back the full amount. If the maturity of this debit scheme is within 6 months, then can i not expect all of the money by that time.Can you explain how you have arrived at 1.5 years is the time to get back the money. Also do you think there is a chance that we wont get back the full amount of the capital
Krish
Franklin Ultra Short Term Bond Fund is having more than 10,000 Cr of AUM and couldn’t believe this is happening even to this size of Fund and in state of shock as am reading this article. I know scores of senior citizens got into in the last couple of years as it was giving returns higher than PSU FD rates. Personally, me too parked decent amount of short term money meant for down payment to purchase a home. Just waiting to see how things will unfold.
Guess, writing is on the wall for most of the debt funds not only from this fund house but all others. Once investors faith is shaken, it would be across the board.
AJ
“The debt market will not be the same again.
This too shall pass.”
…Well, which one is it??
B
Dear Subra, I am an investor in FT credit risk fund (fully aware of the risky side of this fund). Have some queries, would appreciate of you can answer the below question.
• As per ToI Report, the schemes will be handed over to an Administrator.
Who is the Administrator? Within or outside FT? if it is outside FT does that mean that FT has now washed its hands off?.
• As per latest portfolio, some bonds mature as late as 2027/2028. Does that mean that we will have to wait till that time for money?
Thanks.
I would request scheme investors to pose their queries here so that other can also be aware of the same.
Shai
Hey, I had invested in the credit risk fund-growth which was earlier their corporate bond fund! that 5 was at 11 valuation… hv been there for 4 or 5 years… now what happens? will i get the 11 of today’s valuation or will it just be the principal? or maybe lesser than that? what would this mean?
Krish
@ Shai, Reading various material got to know that there is no guarantee of principal and appreciation. Franklin will publish NAV on daily basis until completion of windup. It all depends on how much fund house will recover by liquidating or holding till the maturity of the papers.
Krish
@ B, I guess Franklin will try find buyers of those bonds maturing in 2027/2028 post lockdown. If there are no takers, guess one need to wait till maturity. I am hoping that Franklin should not wait till it receive all the maturity amounts to commence distribution to investors. It should start partial distribution as soon as it liquidates or find takers for any of its bonds. Again no clarity on this matter.
B
Thanks, Krish.
One more point.
Most of the schemes have taken loans to pay for redemptions. These loans will be paid up first and than the balance amount will be disbursed to investors. For FTCredit risk fund. AUM 3500 crores. Loan amount 450 Cr (approximate figures)
Krish
I can understand redemption pressure against 1-3 year duration debt funds but couldn’t comprehend FT Ultra Short Bond Fund. With AUM size of more than 10K crores and 6 months duration papers, they couldn’t handle redemption pressure beats me. It is just a month of lockdown and most of the redemptions happened from liquid/overnight funds. These guys couldn’t manage ultra short term funds really makes me think about their competency. Looks like they got lot of guys from ILFS & Yes Bank. Anyone would be cautious if the next door home is on fire and am shocked that these guys are mute spectators to ILFS, YB and PMC Bank happenings. I am glad that FM, RBI and SEBI are looking into the matter.
B
Adani clears early redemption of 1180 Cr. FT NCD
thenub
@Krish Re Franklin Ultra Short, not a shock if you kept track of the monthly factsheets (probably same with their other funds too).
They always maintained low ratio of high rated paper (AAA/A1+) at about 25%. It was not exactly a secret that UBF took risks to get that extra 1-1.5% returns.
They spread it out well – no concentration. In fact, people were of the opinion that if you have to take risk, take it with Franklin.
Unless you invested without looking at what you were buying – solely motivated by their past returns (aka greed), you knew what you were getting into.
Vodafone downgrades happened in November, and then began its unwinding. Assets kept reducing. Then, the lockdown driven liquidity issues.
From almost 20k cr AUM they came down to 10k cr in 5 months.
AAA/A1+ rated debt went from 25 to 13% in Feb, and -7% in Mar.
Meaning they had to sell the family silver, and borrow to fund the redemptions.
Even if you believe in the fund, you are forced to pull out to avoid getting stuck with junk bonds / big haircuts in the end.
Krish
@thenub. I know people blame investors for greed aka returns.
VR 5 Star Rating, FT brand name, AUM Size of FT USB and in existence for more than decade got me into this fund. Returns alone didn’t get me in. Didn’t come across precedence of winding up of Debt funds in Indian MF industry.
Also thought of dealing with STCG/LTCG in FY 20-21 rather than previous year and I waited till Mar’20 got over. I was negotiating a RE deal and its due diligence taken bit more than usual. I could have redeemed in a week time and then got hit with this shit.