Last Updated on December 12, 2020 at 6:06 pm
The e-vote to decide on the winding up of six affected Franklin Templeton debt funds will be held during 26-29 Dec 2020. Here is why investors should vote “Yes” to the closure and gradual disbursal of withheld funds instead of “No”.
Ideally, SEBI should have played an active role in the matter, told Franklin to close the funds due to force majeure (abnormal) circumstances and not wait for them to conduct an e-vote. At least, they should have requested to be heard during the legal proceedings and presented this view.
Why? Consider the lack of logic in SEBI rules. For the moment ignore the allegations of reckless investment made by the plaintiffs in the case against Fraklin AMC and let us look at the rules in general.
- I run a debt fund and want to change it to a small cap fund. Should I ask consent of unit holders –> No (eg. Quant)
- I run an equity fund that holds 50% equity. I wish to increase it to 80% equity. Should I ask consent of unit holders –> No
- My AMC is running in loss. I would like to sell it to another AMC. Should I ask consent of unit holders –> No
- I would like to increase the TER of my fund by 200%. Should I ask consent of unit holders –> No
- I am tired of running MFs and would like to close the funds. Should I ask consent of unit holders –> Yes. Where is the logic in this arrangement?
Now the allegations of recklessness or big investor or insiders allowed to exit the fund definitely need investigation. This is beyond question. There must be formal enquiry made. Whether something comes out of it or not is a different matter but, it has to be done.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
The key aspect investors should consider is, all transactions are in electronic format maintained by the AMC and the enquiry can proceed independently of the fund closure. Many investors have already suffered for months worried about their money being trapped. A good chunk of the locked-up AUM has been turned into cash as the bonds started gradually redeeming.
What will happen if investors vote “No” and the court orders the funds to open for transactions again? There will be a rush to pull out. The AMC will be forced to sell the bonds that have not yet matured. Many of the low rated bonds practically have no market even on a good day. In today’s climate, it will only make things wore. They will have to sell at a loss the NAV will only fall further.
Instead, if investors vote “yes” and the court orders the funds to close and start graded redemptions; the accumulated cash in the funds would be paid out to investors. As and when the other bonds matures, further payouts will be made. Let an enquiry be conducted independently. If the AMC must face punishment, let them. Why should investors wait for more time and why should they face redemption risk and liquidity risk one more time.
Franklin’s decision in the lead up to the closure must be investigated. However is it necessary for retail investors to face further losses by opening the funds to face redemption risk again?
We strongly recommend that you vote “yes” to fund winding up to maximise the chance of getting your money back sooner. Regardless of the vote, the decision of the supreme court would be final in this regard.
We must take into consideration that the Franklin closure saga was not a result of credit risk. It was a collective fear of credit risk triggered by the lockdown. This is not something that one can plan to prevent against. SEBI was well aware that a market crash would result in a liquidity crisis: How the 2020 debt fund crisis is a repeat of 2008.
SEBI wanted mutual funds to stop private bonds deals (where FT had a dominant presence). It is unfortunate that the lockdown transpired before the deadline to stop! Although Franklin did not handle the lead up to the closure announcement well, they did not have a choice in the matter -the closure decision was mandatory considering the incessant redemptions. Any wrongdoing should be and can be investigated without affecting investors.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)