Featured in Forbes on 27/04/2020
Franklin Templeton Mutual Fund has taken a decision to close down six of their debt mutual fund schemes—an unprecedented move that has caught the investor community off guard. What will be the impact of this move for a retail mutual fund investor? Let’s try to understand:
Which are the schemes that are affected?
The six schemes wound up are: Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund, Franklin India Low Duration, and the Franklin India Income Opportunities Fund. The combined assets as managed under these schemes are worth around Rs 26,000 crore.
What does this mean for me as an investor in these schemes?
Since these schemes are now closed, an investor will not be able to buy or sell any of these schemes and the existing SIPs/STP or SWPs will also stand cancelled.
So what happens to the money I invested in these schemes?
You will not lose the money invested in the aforementioned schemed. It will be paid to the investors but only after the fund house sells the underlying assets. The move was made to protect the investors’ money by avoiding any distress sale to meet their redemption requests.
But when can I expect to get my money back?
It is very difficult give a timeline right now. Many believe that investors will get the money back on the basis of the maturity of the various schemes, however, it is difficult to ascertain currently. It depends on whether there is a buyer in the market for the underlying assets, which will ultimately depend on the recovery of the liquidity crisis that the economy is currently facing. In fact, it was the reason for the entire fiasco in the first place–not finding enough takers to meet the redemption pressure.
What about Franklin Templeton’s other debt and equity mutual fund schemes?
Other than the six schemes that have been shut down, the rest of their debt and equity schemes are not closed, and you can buy or sell those schemes. However, you should avoid selling anything as a knee-jerk reaction.
It is always advised to invest in mutual funds schemes (debt or equity) on the basis of your individual risk profile and overall asset allocation. So if your risk profile is low and the investment wasn’t done as per the right asset allocation, moving or redeeming their other debt funds to a more safer option may make sense. For investors of equity schemes, there is little to worry about as these schemes are bought and sold in the market, however, for other debt funds, it would be advisible do your math to take an informed decision.
But what about my investments in the debt schemes of other mutual funds companies?
You need to revisit your overall debt mutual funds portfolio and analyse whether it was done on the basis of your risk profile, because the entire Franklin Templeton fiasco may hit the debt market negatively given the pandemic crisis. Any panic selling and redeeming of the debt mutual funds will end up putting more pressure on the debt market, which could lead to a ripple effect and can be fatal for an already pressured industry.
The AMFI (Association of Mutual funds of India) has sought to allay investor fears by saying that the Frankin Templeton episode is an isolated event, and have assured investors that their investment in debt schemes is safe. They have also assured that the majority of the fixed income mutual funds schemes are invested in the superior credit quality securities. As a financial advisor, I would also advice investors not to paint other AMCs in the same colour. As mentioned earlier, it may however be the right time to revisit your debt mutual fund portfolio and analyse it on the basis of your financial goals, financial plan and the overall asset allocation.
So I should do nothing?
If your investment was done in line with your goals and risk profile, you would have known that debt funds come in all shapes and sizes along with a credit risk. So watch out for any credit risk fund if you have any, apart from looking at the overall quality of your other debt funds. Always avoid investing only on the basis of any scheme’s past performance or because of the ‘name’ and reputation of the asset management company.
You should always diversify your debt portfolio in different schemes, from different fund houses to avoid depending on any single company. Given the current challenging times, moving your debt funds to a safer AAA-rated and sovereign funds like Banking & PSU debt funds or corporate bond funds may provide the much-needed safety cushion to your portfolio but if your risk profile is very low, you can even switch your debt funds to overnight funds to avoid any negative impact. Once the situation improves, you can always switch back your funds.
And should you liquidate all your debt funds and invest in bank fixed deposits? That again depends on your risk profile and income level—for someone in the higher tax bracket, investing in the debt funds gives them huge tax advantage over bank deposits
So bottom line is go back to your financial plan, stick to it and make any changes only if it is not in line with your financial plan and risk profile.
Stay safe, stay invested.