Frankly On Franklin.

Yesterday morning was chaotic for investors of Franklin Templeton AMC. They woke up to a rude shock of their money in some of the debt fund schemes of franklin MF being locked down now.

The Situation: 6 Debt Mutual Fund Schemes of Franklin Templeton Asset Management company have been wound up starting 24th April 2020. This simply means there will be not further activity of redemption or investments in these 6 schemes. As on 24th April 2020, all these 6 Schemes collectively had INR 26,779 Crore invested.

What Next? These schemes will be treated as locked (Segregated) portfolio, investor now do not have the access to his investments in these at will, rather he will be getting funds as and when underlying securities of these schemes mature.

When do investors get their money back?  Every Debt Fund lends (invests), as per scheme mandate, to companies/institution for various time frames. It can range from 1 day to few years.  Now investors will get back their funds as and when these securities mature. Franklin has communicated that they will be making monthly payments of all maturities they get/any securities they will be able to liquidate at fair price before maturity.

What lead to this drastic Step? Current lockdown in India Economy has strained most of the financial activities, including borrowing & lending. Only Securities of Top Companies/ Govt. Bonds are able to get a price. Franklin always followed Credit strategy. Simply, with investments in these funds it intended to generate High Returns from lending to lower rated companies. Some of Its lending are to unlisted companies & majorly NBFCs.

Since the current lockdown and anticipating trouble, investors restored to massive redemption. With limited liquid asset, Franklin has been borrowing till now to meet these outflows. Funds can borrow max. 20% of AUM. As redemption pressure increased further, they decided to wind up the schemes.

Will investors get their money & when?  YES, Investors will get their money. As mentioned above DEBT funds further lend to companies/ institutions for varying period. Now investor will get their money back as and when these securities will mature or if Franklin finds any early exit opportunity. Though, all receipts from sale/maturity would be first allocated against outstanding borrowing and other liabilities of the scheme in accordance with Regulation 41(2) of the SEBI Mutual Fund Regulations.

Importantly Franklin will not change any fund Management fee, barring nominal audit, custody fee etc. Expense Ratio is generally high in these Credit Funds. 

Will investors get their entire Investments back with expected gains? Well in the current scenario small and low rated companies will face difficulties in managing their cash position or raising funds, so there will be delays in repayments from few, others will seek recast of loans as even Govt. supports it. But, by and large considering 10% delinquency investors should be able to get their capital back in a Base case scenario.

What Franklin did in our opinion was the best they can in the given situation. If they would have continued with the scheme and started selling securities at discount, they would have eroded the value of the funds. NAVs would have tanked.

The Learning: For an investor the Big question lies on what your expectations from your Debt Fund.

  1. Do you look at as an instrument to be picked for Long term Capital Gain Benefits & get moderately better returns than from a Risk-free instruments like Bank Fixed Deposits. If your answer is Yes, then you would have never been in any of these franklin Debt Funds. A portfolio which is fetching 9% ++ Returns which is almost 50% higher than current Risk-free rates will comes with certain caveats and risk.
  2. However, if you were OK with some credit risk (Investing in low/ exceptionally low rated papers) and were looking for some better managed high returns with long term capital gain benefits, then you understood the risk.
  3. Investors who needed immediate liquidity are the ones who are genuinely hurt, and those who will hold it should be able to sail through it.

 Clarity First. Asset Allocation First. Understand the Risk & Reward Ratio.

Leave a Reply

Your email address will not be published. Required fields are marked *