Franklin Templeton Debt Funds Crisis: Know About Six Closed Debt Funds

The Six Closed Debt Funds
The times are such that Coronavirus Disease or popularly called COVID19 is part of each news. The economy is in shambles as there is no economic activity in place to prevent people from the pandemic.

In all the news that we have seen or heard in recent times, one is quite a shocker. The economy was already falling since 2017. However, the COVID19 pandemic lockdown has hit a brutal nail.

Franklin Templeton, a renowned mutual fund management company, wound up its six debt mutual funds. The investors throughout the nation, not just limited to these six funds, are anxious. This piece talks about everything about the Franklin Templeton Funds winding up.

The Debt Funds

The debt mutual funds are like any other mutual funds in their structure. People invest, and the asset management company pool all the investments. Industries when need the money, they either sell their stake or take debt from the market. 

These debt funds then provide money to the industries against interest. This interest and the repayments on maturity are the returns that the investors get. Based on the fund, one can put in and pull out your investments in the fund. 

The instruments that these debt funds invest are tradable in the market. These debt instruments determine the value of the fund. Some debt instruments are bonds, commercial papers, and fixed income instruments.

The Background

The COVID19 pandemic grew and the nation went for the lockdown. The Franklin Templeton had these six debt funds. Now, the debt funds are usually for a shorter duration. Most people put money in these funds for 3 months to 3 years usually.

When the lockdown was asserted, the economic activities came to a halt. People whose incomes were affected, they chose to pull their funds out. 

People also understood that situation will not normalize anytime soon, while debt funds are meant for the short term.

The markets started crashing. It induced another cycle of panicky. On one hand, people started pulling out money; and on the other hand, new investors were not putting any money. Ultimately, the funds were under redemption pressure.

The Franklin Templeton Issue

The Franklin Templeton had six funds. The funds are Franklin Ultra Short Bond Fund, Franklin India Low Duration Fund, Franklin India Short Term Income Plan, Franklin India Dynamic Accrual Fund, Franklin Income Opportunities Fund, and Franklin India Credit Risk Fund. The fund cumulatively ranges ₹26000 crores.

When the COVID19 crisis caused the havoc, markets started crashing. Every asset started losing its value. Some started losing it below their book value. For example, a Cadbury Dairy Milk of ₹10 is sold for ₹5.

The same thing happened to these debt funds. The debt funds started losing value below their par. If the instrument these funds trade-in, trade at a below-par level, the fund would lose its value. At this time, it became important for the fund house to protect the investors’ money.

The Aftermath

Franklin Templeton has winded up its funds. It means no one will be able to buy or sell the units of the mutual fund. It means today no one cannot get their money back. Their money shall lie in the fund in a segregated portfolio.

Franklin Templeton says that it will wait for its instruments to mature. As and when they will get their money back, they will keep returning them to their investors. Neither there shall be any exit load nor shall the company charge any expense ratio when returning the money.

The average maturity of the Franklin Ultra Short Bond Fund is about 7 months. For Franklin Low Duration it is 1.5 years, Franklin Short Term Income is 2.75 years, Franklin Dynamic Accrual it is 4.25 years, Franklin Income Opportunities it is 2.5 years, and Franklin Credit Risk that average maturities it is 3 years (as of 31st March 2020). So whenever there will be a cash inflow, the payouts shall be made. However, there is no clear formula on how will the payout take place.

The SEBI Clearance

A question is that what SEBI was doing amidst the crisis. Can Franklin India close the fund on its own? As per SEBI (Mutual Funds) Regulations, 1996 the Mutual Fund company can wind up the fund if it is to protect the investors under regulation 39(2)(a).

Franklin India claims to have discussed the issue with SEBI and they went ahead only after the approval of SEBI

Winding Down

The pandemic is testing the economy and the patience of the investors. The winding-up sent poor signals and suddenly investors throughout the market are in a panic. Brokers body, Association of National Exchange Members of India (ANMI) too met the Finance Minister for interference in the matter. The debtors might not be able to repay the money if the economy does not revive soon after the crisis.

However, the view of Franklin Templeton India should be considered. They are trying to prevent the value of the investments the most they can.

Under current times, investors should become cautious. We all can see this as different learning. After all, “Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing”.