Why Franklin India Ultra Short Bond Fund fell more than 4% on 16th Jan 2020?

Why a debt fund like Franklin India Ultra Short Bond Fund which is rated 5 star by valueresearchonline and Morningstar fell more than 4% yesterday ?

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@Bhuvanesh

Possibly an impact of SC’s dismissal of Telco’s AGR plea.

yes, even I was wondering the same. It wiped out all my profit :frowning:

For me all profits were wiped out and return is negative.

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Now the question is should investors remain invested in this fund or exit ?

More than 11.5% of the scheme’s portfolio is Voda and Airtel papers. Not sure how much of this has been provisioned yesterday - if this was <100%, the returns are likely to fall further.

I am hoping against hope for some relief to these telcos - it another player shuts shop, then its a duopoly which would be disastrous for the country.

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Yesterday these Fraklin Templeton India saw sharp drops in NAV
Franklin Income Opportunities -5.14%
Franklin Credit Risk -4.91%
Franklin Short Term Income -4.56%
Franklin Ultra Short -4.36%
Franklin Dynamic Accrual -4.28%

The reason is Franklin India decided to write of it’s exposure to Vodafone Idea debt. Recently the Supreme court has issued a ruling asking all telecom companies to pay dues close to Rs 1lkah crore. Out of this Vodafone was supposed to pay Rs 50,000 crore to the govt. Airtel which also owes the govt Rs 35,500 crores went to the supreme court asking it to review its judgment which the SC rejected. Given this development, Vodafone is no situation to pay Rs 50,000 crores because it already has mountains of debt.

Now, given that it doesn’t have any money to pay the govt, it is very unlikely that it will pay the bondholders such as Franklin. So Franklin India in advance has decided to write off the entire value of its Vodafone holding to ZERO. This is the reason why the NAVs fell.

Now, if somehow miraculously Vodafone finds a solution to its problems and honours all its promises, Franklin will get back the money and the funds NAV will increase proportionally.

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Was this a 100% write off or a part of it?

Hi Bhuvanesh,

could you please elaborate what does it mean?

It looks like a 100% write-off. But it is still not yet clear if the AMC has created a side-pocket because all these scheme had provisions for side pocketing if I am not wrong. I’ll update the post when there is an update on side pocketing.

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Let’s say you start a company and you need Rs 2 lakhs. You already have Rs 1 lakh, so you issue some bonds to other people to borrow Rs 1lakhs. All bonds have something called a coupon - basically, a rate of interest that you promise to pay every year. So let’s say, for example, you promise to 7% every year to borrow that 1 lakh. Every bond has the maturity and you return the principal on maturity until then you keep paying 7% interest every year from the money you make by running the business.

One fine day you wake up to find that you owe the govt 10 crores and you don’t have enough money to pay that. How will you continue to pay the interest on the bonds? In that case, the guy who bought the bond has to say goodbye to his money - this is called a write off.

Franklin India has bought Vodafone bonds. Now given that Vodafone is in trouble, it is highly unlikely that it will continue to pay the interest on the bonds and the principal upon maturity. So Franklin instead of waiting for Vodafone to default, has gone ahead and written off the it’s exposure to Vodafone debt.

Hope this explains. Also ,if you want to learn about the basics of bonds, check out these webinars we had done a while ago:

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Talk to your advisor.

I read about side pocketing
I have a doubt, If I redeem my MF, am I entitled to side pocketing fund?

Yes.

It had enabled side-pocketing for some of its schemes back in Nov 2019:

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Looks like no side pocketing, since there is no official default by Vodafone yet. Franklin has just downgraded the bonds internally.

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yeah
I talked to them, and they have not segregated the fund yet.

When it comes to debt fund look for 3 star and not 5 star. Unlike equity funds debt can’t generate much higher returns without risking more. Franklin holdings credit quality was not top notch hence they were getting better returns until now. Hence the 5 star rating. Always look for 3 star in debt and not 5 star. My 2 cents.

I am also an investor in Franklin Templeton Debt Fund (Ultra Short bond), and I have significant investment in Franklin’s debt funds. Franklin has a good reputation and their funds are well managed with good returns, but in the case of their investment in Vodafone, Franklin Templeton has acted against the interests of their existing investors, and the reasons for this are

The investment in Vodafone by Franklin Templeton is marked down to Zero even though Franklin Templeton has requisite collateral matching their investment in Vodafone. There is value for the collateral and no way this investment should have been marked to Zero causing a loss to existing investors

By not creating a side pocketing (this is the norm for all MF’s now) and keeping investment in the fund open to the tune of Rs 2 Lakhs per person per day for new investors, Franklin Templeton is favouring new investors and doing grave injustice to existing investors. New investors that will invest in the fund will enjoy superior returns when some value of the investment in Vodafone is realised by Franklin Templeton whereas existing investors will be at loss

What should existing investors iN Franklin Templeton do?

  1. Do not sell your holdings in the Franklin Templeton debt funds, if possible, invest more. This is because the damage is already done, from here the nAV will only go up and not down
  2. Write to the senior management (VP & above, incl Fund Manager) asking them for their feedback on the value of Vodafone collateral and reasons for not side pocketing. I have written to their President and other senior management
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