Franklin Templeton Tragedy What’s still positive for a mutual fund investor

So get straight onto this Franklin Templeton has just terminated six of his debt schemes. These funds are the Franklin India Ultra Short Bond Fund, the Franklin India Short Term Income Fund, the Franklin India Credit Risk Fund, the Franklin India Low Duration Fund, and the Franklin India Dynamic Accrual Fund.

The combined value of these assets, as of April 22, is Rs 25,856. That doesn’t mean Franklin Templeton shutdown. Moreover, even after these schemes are wound up, FTI still has seven other debt funds in its stable, with combined assets under management of about Rs 17,800 crore as on April 22.

Apart from that, the company has 15 equity funds worth Rs 36,663 crore and 11 hybrid type products (those investing in a mix of equity & debt) with Rs 3,143 crore assets as per the Value Research data as of March 31. Those funds will continue to operate as planned. “In India, Franklin Templeton has a long history of more than 25 years, with 33 per cent of our global workforce located there. Our dedication to the business and our investors in India remains steadfast, “said Jenny Johnson, Franklin Templeton’s President and CEO in a press release issued by the fund on April 23.

STP investors get caught in the mess

Some investors who unknowingly got trapped in the Franklin Templeton mess were those who had signed up for systematic transfer plans (STPs). This facility operates much like the systematic investment strategy, except if you already have a lumpsum amount waiting to be invested in equity, STP will encourage you to park it in a debt fund and make a monthly or weekly move to an equity scheme within the same property. Also, the STPs have come to a grinding halt with Franklin Templeton winding up six schemes. This means that creditors who had intended to go to equity funds with a short stop in Templeton’s debt funds are now deeply trapped in these schemes.

Stay away from credit risk funds, for now

The COVID-19 pandemic led foreign investors to rapidly sell off equity and debt portfolios in India as well as other emerging markets. But there were hardly any buyers, particularly for scripts with low ratings. Banks weren’t willing to lend, so they parked with India’s Reserve Bank their surplus cash. According to RBI data, banks invested nearly Rs 7,215 trillion with RBI at just 3.75% interest (reverse repo rate under the liquidity adjustment facility), up from an average Rs 2,371 trillion at the end of March and just about Rs 506 billion at a rate of 4.9% at the end of January 2020. With no purchasers for its shares and without a demand. Thus investors need to be cautious about taking too much credit risk,  if you wish to invest in debt funds, then stay away from credit risks at the moment. 

Are debt funds safe?

Debt funds tend to offer decent tax-adjusted returns for investors in the higher tax brackets and who plan to invest for three years or more. As long as you stick to funds that participate in sovereign and AAA-rated securities such as corporate bonds and bank & Government bond funds.

What’s still positive in this?

Franklin has taken this move to maintain the drying liquidity in the corporate debt bond market but at least your money is still safe the only pain will be to STP investors in the sense that you can not withdraw your money currently at one go which is actually the whole purpose of debt bonds for most of the investors. But this precautionary measure has at least insured your money is safe and it will be returned to investors as the bonds mature.

Positive Shades

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