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Examining: What went wrong, how it will impact investors, other questions
Overview
Franklin Templeton Mutual Fund closed six of its debt schemes in India (Franklin India Low Duration Fund, Ultra Short Bond Fund, Short Term Income Plan, Credit Risk Fund, Dynamic Accrual Fund, Income Opportunities Fund)
Reasons: severe redemption pressure, illiquidity in bond markets
Possible cause: COVID-19
What happened?
Extreme drop in liquidity in bond markets + large redemptions during coronavirus outbreak
Back story
Debt mutual funds, even some liquid funds which are considered the safest, have in the recent past experienced tremendous volatility.
These six schemes of Franklin Templeton Mutual Fund had taken aggressive credit calls in their portfolios
Franklin Templeton AMC has had a history of high returns, by taking on higher risk in their debt portfolio.
"This strategy started to show cracks over the past 18 months, since ILFS, Vodafone, etc. FT created side pockets in these funds to hold defaulting/suspect debt. Our understanding is that recent issues like COVID-19 lockdown, illiquid bond markets, SEBI opening the window for AMCs to borrow to meet redemptions, etc. led to further problems. Worried investors withdrew money which further made the problem worse," he says.
As the portfolio shrinks, Singhal adds, the fund is left with a higher and higher proportion of less liquid and probably riskier investments. The mutual fund borrowed money to pay off redemptions but appears to have hit the regulatory limit for borrowing.
"Investors will not be able to withdraw or transfer their existing investments or start any SIP in those schemes, or make fresh investments in them," explains Adhil Shetty, CEO, BankBazaar.
So, when will the investors get their money?
It is expected that once the macroeconomic situation improves, the cash-flow pains will be relieved, and they be able to make good on their debts, allowing investors to withdraw their investments, according to Shetty.
FT will do an orderly sale of their investments and return the money to investors. They may publish a Net Asset Value (NAV) for the schemes on a daily basis and eventually communicate more details on an exit strategy
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