On 23-04-20 Franklin Templeton Mutual Fund announced the winding up of six of its debt funds.
The six debt funds wound up are Franklin India Low Duration, Franklin India Dynamic Accrual, Franklin India Credit Risk, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund.
There will be no purchases and redemptions made in these funds post-cut-off time on April 23, 2020.
What does it mean?
If you are an existing investor in any of the above-mentioned funds, then you can no longer redeem your money. Your money is locked in these funds, until the mutual fund company makes further payments.
You could have received a mail from Franklin regarding this. If you have not read that, you may please read the same here.
Why did Franklin make such a decision?
Bond markets are facing reduced liquidity because of the COVID-19 economic crisis.
This decision to wind up schemes is to ensure orderly and equitable exit of investors without having to sell in the illiquid market.
The papers in which they have invested are less-liquid now. If they redeem them now they have to sell it for a discounted rate.
Investors are redeeming from these Franklin funds. To meet the redemptions if they sell the underlying papers at a discounted rate, it will be a loss for investors who are redeeming and who are remaining invested.
So they decided to wind up the funds. As and when the underlying papers mature or when the liquidity for these investment papers normalise, they will make the payment in a staggered manner to investors.
When will they make the payment?
The decision to wind up the funds and stop redemptions is to prevent further value deterioration in these funds on account of selling the underlying investment papers in the portfolio at very low prices. As the debt market normalises, the fund could consider to sell the assets at a reasonable value.
Also, this winding up process will happen in a staggered manner as the underlying papers mature on different dates. The shorter the duration of the fund, the faster it could get wound up. Of the six debt funds,
- Franklin India Low Duration has 1.2 years Macaulay duration as of March 31,
- Franklin India Dynamic Accrual Fund (1.9 years),
- Franklin India Credit Risk fund (2.2 years),
- Franklin India Short Term Income Plan (2.15 years),
- Franklin India Ultra Short Bond Fund (0.54 years) and
- Franklin India Income Opportunities Fund (3.2 years).
Franklin Templeton has released the security level portfolio of these 6 schemes and also the maturity profile of these 6 schemes. You can download them below:
Will there be returns during the wind-up to payment period?
The underlying papers will earn interest during these periods and that will be passed on to the investors. Franklin Templeton has mentioned the expected return for the first year in the maturity profile PDF-Download Here.
How it could impact your financial plan?
This situation was completely unexpected, unfortunate and unpredictable. Though, this could be a temporary setback, this could have caused you a serious impact on your financial plan and goals
or it could seriously affect your credit risks.
If you have invested your emergency funds or funds needed for your short-term goals in these funds, then you need to revamp your overall portfolio to accommodate this setback in your financial plan.
How to overcome this negative-impact?
To get back money from these funds, as an investor you don’t have to do anything. Franklin Templeton will release payments periodically either when the liquidity comes back or when the underlying investment papers mature.
1. Reassess your other credit-risk investments
If you own other credit risk oriented debt funds, reassess them. If there is going to be a ripple effect for the Franklin debt funds closure, and then will it affect your other debt funds?
Do you own any company deposits? Please check the credit risk in those deposits.
2. Emergency Funds and Short-term Goals Money Locked
If you have kept your emergency reserve or the corpus required to meet your short-term goal, then you need to create an alternate plan.
Some options would include:
i) Other Fixed income / debt investments:
If you have other fixed income / debt investments, you can ear mark them for emergency purpose and also to meet your short-term goals.
ii) You can consider withdrawing from your PPF or EPF investments.
iii) Taking Loan: This option comes with an interest cost. You can take loan against your other investments like your insurance policies, mutual funds and gold. As and when Franklin makes payment you can start repaying your loan.
Definitely it would have been a shocker to you as an investor when a long-term player like Franklin closed its 6 funds. It has happened and things are out of our control. To bring things under your control, doing a overall revamp of your financial plan is needed.