Franklin Templeton, yesterday announced that they are winding up these 6 debt schemes. These schemes had over Rs 27,000crores of AUM and this is probably the biggest event in the history of debt mutual funds in India.
- Franklin India Low Duration Fund
- Franklin India Ultra Short Bond Fund
- Franklin India Short Term Income Plan
- Franklin India Credit Risk Fund
- Franklin India Dynamic Accrual Fund
- Franklin India Income Opportunities Fund
I am sure you will have a lot of questions about your investors, so here a few short FAQs, that should give you a sense of what’s happening.
1. What just happened?
Franklin announced that they are windowing down those 6 schemes. Meaning they are shutting down the schemes, selling the assets and returning the money to unitholders.
With the lockdown of the Indian economy, liquidity has been generally tight in the bond markets. There has been large-scale selling of debt and people are moving to cash. When a fund faces severe redemption pressures, it first seems the bonds that are more liquid and can be sold easily. But if the redemptions continue, it will find it difficult to sell the less liquid bonds because in a risk-off environment investors will demand lower prices on the bonds than normal. And all of these Franklin debt schemes have been seeing redemption pressures for quite some time. Some of the schemes were also hit with Vodafone exposure.
The impacted schemes of Franklin Templeton were able to meet their redemption payment obligations across all market conditions and even during the initial phase of the Covid-19 pandemic lockdown despite redemption pressures and increased market illiquidity. However, the extension of the lockdown has heightened redemption volumes and reduced inflows to unsustainable levels. The schemes even resorted to borrowings within permissible limits in line with market practice to fund redemptions during this time but given the situation, we felt that it would not be prudent to leverage the schemes further. While the respective valuations of these schemes have been marked promptly and conservatively thus far, continuous redemption pressures in the backdrop of a severe dislocation in the corporate bond markets would place great strain on our ability to ensure equitable treatment of all investors. Further, given the current unprecedented situation, even the committed borrowing lines maintained by the funds are inadequate to meet the demand for sustained borrowing across the schemes.
We explored the possibility of suspending redemptions until market conditions stabilize without winding up the schemes. However, conditions for such a suspension under the current regulatory framework, such as a maximum suspension period of 10 working days (in 90 days) and the requirement to honour redemptions up to INR 2 lakh per day per investor, rendered this approach unviable to meet the severe sustained impact of the current crisis (refer
Annexure III - FAQs for options considered besides winding up).
The Trustees were hence left with no option except to initiate the winding up of the schemes with a view to protect the interests of unitholders. Winding up the schemes was determined to be the best way to ensure a fair and equitable distribution of monies to unitholders while minimizing erosion in value for investors…
3. What does winding up means and what happens to my investments?
WInding up means that Franklin is essentially shutting these schemes down, selling all the bonds that it holds and is returning the money to investors. It remains to be seen as to how long this might take. The AMC will do everything it can to wind these up as soon as possible and return te monies to unitholders.
4. Can I redeem my investments?
Effective today, all fresh redemptions and purchases in the schemes have been stopped. Your money is essentially locked-in. The funds will continue to declare a NAV every day and no fee will be charged for the management.
5. Locked-in, what should I do?
There’s nothing much for you to do. Franklin will work towards liquidating (selling) these assets and will continue to pay back investors when they sell the papers, receive interest payments and on bond maturities.
6. Was this the right thing to do?
This will be a fraught debate. But in the event of the credit markets seizing up and with heightened redemptions, there isn’t much the fund could do. What would’ve happened that the existing investors would’ve continued to lose money if the funds operated as usual.
7. What happens to my SIPs on Coin?
All the SIPs will be cancelled. You can create new SIPs in alternative schemes.
8. I invested in these schemes yesterday on 23 April, will my orders be rejected?
Unfortunately, no. The orders will be processed.
9. Are other debt schemes safe?
There will be a lot of panic and rumours spread post this. But it would always be wise to ignore the noise, analyse the funds in your portfolio and make rational choices. Redeeming in panic will only end up with you losing money.
10. Is Franklin India safe?
Absolutely! They have been here for a long time and have an incredibly long track record. It would be wise to analyse funds in isolation instead of taking rash decisions or extrapolating these issue with these 6 schemes to other funds. Just because there was an issue with these 6 funds doesn’t mean there’s an issue with other schemes.
11. When can I expect my money back?
Here are the timelines: