Exactly a week ago, well-known mutual fund house, Franklin Templeton, announced that it was winding up six of its debt mutual fund schemes namely,
- Franklin India Low Duration Fund
- Franklin India Dynamic Accrual Fund
- Franklin India Credit Risk Fund
- Franklin India Short Term Income Plan
- Franklin India Ultra Short Bond Fund
- Franklin India Income Opportunities Fund
But what exactly triggered this fallout? And how does it impact you?
Well, cumulatively, these six funds manage investments worth ₹26,000 crore. The winding up wasn’t a sudden event. It was a series of mishaps that snowballed into this fiasco. Here’s what happened:
The Background
Santosh Kamath, Chief Investment Officer for Franklin’s debt schemes, adopted a strategy that involved investing in risky assets to yield a higher return. Over the last many years, this strategy of investing in lower-rated securities ensured that Franklin’s funds remained ahead of the competition, resulting in much higher returns for investors. Kamath was transparent about his modus operandi.
The Backfiring
This strategy, however, started backfiring in January 2020, when the fund had to write-off its debts to the telecom industry, following the Supreme Court decision on the Vodafone Idea case. The next jolt was the collapse of Yes Bank in March, due to which they had to write-off more debt.
To top it all, with the Covid-19 pandemic taking over the world, a liquidity crisis began to unfold. Fresh investments dropped considerably and investors’ redemptions requests flooded fund houses. Franklin was no exception.
To honor the redemptions, Franklin started dipping into its cash reserves. When that was not sufficient, they tried selling some assets in the open market.
But by this time, there were no buyers. As a last resort, they started borrowing to honor the redemption requests, hoping that the liquidity crisis would end soon. Eventually, with that hope diminishing, they decided to wind up six debt funds on April 23.
What does this mean?
Franklin Templeton will not accept any new investments in these six schemes. They have stopped all redemptions as well.
This does not mean a write-off of its obligations to investors.
Investors will receive their money over a period of time, as and when the bonds and debts mature and the fund receives the money.
Reserve Bank of India to the rescue
In a quick response to this crisis, the Reserve Bank of India announced a special liquidity infusion of ₹50,000 crore for mutual funds only four days ago. All the Asset Management Companies (aka Mutual Fund Houses) can borrow up to this amount until May 11, in case they are facing liquidity issues.
This move by RBI acts as an assurance to investors, encouraging us to stay invested rather than sell in panic.
Since Franklin’s six debt funds have ceased, they cannot benefit from this. Had the RBI announced this relief measure a week earlier, Franklin’s fate would have been different. However, this benefit can be utilized by other fund houses as well as by Franklin for the rest of their schemes.
What should you do if you’ve invested in any of these schemes?
First and foremost, don’t panic. Be patient, your money will be returned in time. Consider this investment a medium to long term investment for yourself.
What should you do if you have not invested in any of these schemes?
Again, don’t panic. Review your investments/SIPs. Find out how many of the schemes you’ve invested in are debt and how many are equity oriented funds. In either case, consider equity and hybrid mutual funds for medium and long term investment. For short term investments, until we tide over these uncertain times, it’s best to go for liquid mutual funds or bank fixed deposits.
