Franklin Templeton Mutual Fund Announces Winding Up Six Debt Mutual Fund Schemes

Franklin Templeton Mutual Fund has announced winding up six yield-oriented, managed credit debt funds from April 23. The fund house has took the step citing "severe market dislocation and illiquidity in the fixed income space" caused by the Covid-19 pandemic,

The announcement took many Advisors and Investors for surprise, as investment plans of many investors in the scheme may go for a toss due to sudden illiquidity in their holding.

The wound-up schemes include:

1. Franklin India Ultra Short Bond Fund
2. Franklin India Low Duration Fund
3. Franklin India Short Term Income Plan
4. Franklin India Credit Risk Fund
5. Franklin India Dynamic Accrual Fund
6. Franklin India Income Opportunities Fund

The 6 wound up schemes are no longer available for fresh investments or redemption post cutoff time from 23 April 2020. All Systematic Investment Plans (SIP), Systematic Transfer Plans (STP) and Systematic Withdrawal Plans (SWP) into and from the above-mentioned funds stand cancelled post cut-off time from 23 April 2020.

All other schemes managed by Franklin Templeton Mutual Fund in India—equity, debt and hybrid—will remain unaffected by this decision.

In its communication to investors the fund house mentioned:

'The impacted schemes of Franklin Templeton were able to meet their redemption payment obligations across all market conditions and even during the initial phase of the Covid-19 pandemic lockdown despite redemption pressures and increased market illiquidity. However, the extension of the lockdown has heightened redemption volumes and reduced inflows to unsustainable levels. The schemes even resorted to borrowings within permissible limits in line with market practice to fund redemptions during this time but given the situation, we felt that it would not be prudent to leverage the schemes further. While the respective valuations of these schemes have been marked promptly and conservatively thus far, continuous redemption pressures in the backdrop of a severe dislocation in the corporate bond markets would place great strain on our ability to ensure equitable treatment of all investors. Further, given the current unprecedented situation, even the committed borrowing lines maintained by the funds are inadequate to meet the demand for sustained borrowing across the schemes

We explored the possibility of suspending redemptions until market conditions stabilize without winding up the schemes. However, conditions for such a suspension under the current regulatory framework, such as a maximum suspension period of 10 working days (in 90 days) and the requirement to honour redemptions up to INR 2 lakh per day per investor, rendered this approach unviable to meet the severe sustained impact of the current crisis (refer Annexure III - FAQs for options considered besides winding up).

The Trustees were hence left with no option except to initiate the winding up of the schemes with a view to protect the interests of unitholders. Winding up the schemes was determined to be the best way to ensure a fair and equitable distribution of monies to unitholders while minimizing erosion in value for investors'

Following the decision to wind-up the schemes, the fund house will aim to make regular payments to investors from portfolio maturities, coupon and pre-payments, once the borrowings in the funds have been paid back. Hence, investors will receive their money back as and when liquidity is available to the AMC by either selling securities or receiving maturity proceeds. [Refer: Annexure II: Repayment Process pursuant to Winding up]

PersonalFN's View: The fund house will rely on coupon payments, maturity value of underlying securities, and selling of securities at realisable value. While the fund house expects to realise most of the proceeds as per maturities, there may be some low rated securities that may even default on the due date. The fund house may create segregated portfolios for such securities and pay back as and when the money is realised.

For the time being investors won't be able to buy or sell from these funds and have to rely on the fund house to get back their money. We expect a monthly or quarterly payment windows to distribute realised funds. It will be prudent to check the average maturity of portfolios of each fund and expect major repayment within that period.

While the fund house has done this to protect investor interest, it has made the funds illiquid from investors view point. Many investors may lose trust on debt funds to park their short term money. Going further, investors may have to consider liquidity risk due to AMC action, while investing in any high credit risk oriented debt funds. Hope the regulator steps up and comes out with some clarity for investors on the illiquidity part for other debt schemes out there. Moreover frame strict guidelines to restrict fund managers from putting investors hard earned money at risk by exposing them to low rated securities for higher yield.