Franklin Templeton winding up six of its debt funds

Claiming its first victims in the mutual fund industry, the ongoing Covid-19 crisis has hit six schemes of Franklin Templeton Mutual Fund. In an unprecedented development for open-ended funds, the fund house has announced voluntary wind-up of six schemes namely - Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Short Term Income Plan, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund and Franklin India Income Opportunities Fund.

What has happened?
Effective April 24, 2020, the wind-up comes in the wake of the theatrical fall in liquidity across the bond market caused by the pandemic and the consequential lockdown of the Indian economy. Citing the evident Covid-19 related market dislocation impacting the Indian credit markets, Franklin Templeton made it clear that the decision to close the six yield-oriented schemes is in the best interest of investors. According to the fund house, winding up of the above mentioned schemes is the only feasible option to preserve value for unitholders.

Consequently, no transactions would now be possible in these schemes and the fund house would dispose-off assets and the realized value will be distributed to all existing unitholders in proportion to their respective claims over the coming months.

Why was such an eventuality necessary?
The fund house sent out communications to investors explaining the rationale behind this unexpected announcement. Franklin Templeton said that despite active intervention from RBI, yields were rising coupled by lower trading volumes in the bond markets. Further, amidst the threat of Covid-19, the rising uncertainty and risk aversion, various mutual funds were faced with a liquidity crunch.

Templeton clarified that while its schemes were able to adhere to all redemption obligations during the initial phase of the crisis, however, unprecedented situation has put these schemes under severe stress and the fund house feels that they would no longer be able to generate adequate liquidity to fund redemptions.

Acknowledging the same, they stated, "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."

Before settling in with this move, the fund house explored different possible actions - possibility of temporary suspension of redemptions until stable market environment restored, option of selling the securities at a discount to meet redemption requests and to elongate the redemption payment. However, the current regulatory framework, possible erosion of value and inadequacy to meet redemptions rendered these approaches unviable to meet the unrelenting impact of the ongoing crisis.

How big is the impact?
Perhaps, pretty big and mainly for two reasons. First, all these are prominent funds, managing a total of about Rs 30,000 crore by the end of March, though the AUM now might have dropped given the heavy redemption pressures faced by the fund house, each of them ranks among the top ten by AUM in their respective categories. Second, Franklin Templeton has a strong retail franchise and it's likely that such a move may affect a lot of retail investors.

Look at the table below to get some perspective of the performance numbers of these funds.

While this definitely is a hard blow to the debt fund industry, these six funds were already saddled with difficulties in terms of debt defaults and subsequent segregations. In the recent months, all of these funds had written down their respective exposure to troubled bonds of Vodafone Idea Ltd. and a few of these also wrote down their exposures to Yes Bank Ltd.

What's the way forward?
As redemptions from these six schemes now stand closed so whatever sale proceeds the funds house will be able to garner will be distributed among the unitholders in proportion to their respective holdings. According to Templeton, the securities held in these six funds remain sound and they will try their best not only to liquidate the portfolios at the earliest but even and at the best possible values. Further, once there comes a recovery in the market, the fund house will actively explore the option of early exits via sale/prepayment to aid repayment prior to the maturity of the portfolio investments. They'll also continually share updates with investors on these schemes.

Franklin Templeton will not charge any management fees on these funds, however, expenses in the nature of audit fees, custody fees, fund running expenses, etc, will continue to be charged. Further, the fund house clarified that the other schemes in its kitty will not in any way get impacted by the winding up process.