On 23rd April, 2020, Franklin Templeton Trustee Services Private Limited wound up 6 open-ended schemes of Franklin Templeton Mutual Fund pursuant to the provisions of regulation 39(2)(a) of the SEBI (Mutual Funds) Regulations, 1996 including Franklin India Low Duration Fund, Ultra Short Bond Fund, Short Term Income Plan, Credit Risk Fund, Dynamic Accrual Fund and the Income Opportunities Fund. The financial probable jeopardy has resulted in about Rs. 30,000 crores of investor money being locked up.
Franklin Templeton has had the reputation of being the best in the business when it came to debt mutual funds. Franklin, unlike other debt funds, invests in risky bonds and since the return is a reward for risk-taking it has managed to earn a favourable return for the investors in the past years.
So far everything had worked out for Franklin and its risky bonds, until the pandemic hit. With no source of cash inflows with the investors, the next option was to redeem the invested idle cash. This is what happened with Franklin, it saw a sharp increase in the redemption request from its investors. Debt funds aren’t that liquid and one cannot ask back for the money invested in bonds before its redemption period. So, Franklin had to use its cash reserves. However, after a certain point, even the cash reserves ran out.
The second option in front of Franklin was to sell the bonds in the market but seeing the current market sentiments who would choose to buy these risky bonds. So there are a no. of sellers in the market and no buyers to buy. Franklin could sell its AAA-rated bonds but if it does that then all the good bonds would be sold and that would put the other investors at risk. Seeing the fiasco created and protect the interest of investors, Franklin Templeton fund manager would up 6 of its debt funds. The fund house said that it had decided to wind up the schemes to preserve the value, at least, at the current levels, for, the value was getting eroded due to a combination of redemption pressures and mark-to-market losses following the lack of liquidity on account of the COVID-19 impact on markets.
As the scheme of liquidation portfolio and repayment comes in question, the investors will be returned in quite a “meandering” or “staggering” manner guided by the maturity profile of individual instruments and overall fund portfolio. The fund house will either wait for the maturity of securities or sell them in the secondary market.
Franklin Templeton’s credibility has not been completely shattered considering it still holds around 17,800 crores in their other debt funds. The notion of panic selling among the buyers in the market can cause considerable harm to the long-term return potential of portfolios and investors should avoid that. “Investors could end up selling at throwaway prices what was accumulated through a long accumulation journey,” said the fund house.
The staggered exit of open funds by Franklin Templeton states how covid19 apprehensions have started to erode the consistency of reliable markets like Mutual Funds.