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Franklin India Savings Plus Fund – A Debt Fund For First-time Investors?

Franklin India Savings Plus Fund can be classified as an ultra-short term debt mutual fund that invests predominantly in floating rate bonds (to minimise interest rate sensitivity) of reasonably good credit quality, making it a reasonable candidate for first-time debt mutual fund investors to consider. In this post, I look at the main characteristics of the fund. This post is not a recommendation to invest in this fund. It is a recommendation to learn more about this fund.

In a normal bond, the interest rate payments remain the same while its current market price varies according to supply and demand dictated by interest rate movements. In a floating rate bond, the prize remains close to its issue price, but the interest payments are periodically reset according to interest rate movements.  So this reduces a drastic change in NAV of a fund holding these bonds.

There are many ways in which floating rate bonds can be used and some of these have been explained in a previous post: How Floating Rate Debt Mutual Funds Reduce Interest Rate Risk. Although I had not recommended investing in such funds before, I believe an exception can be made for Franklin India Savings Plus Fund.

The scheme information document says the fund will have a minimum exposure of 65% to floating rate bonds. A look at past fund sheets reveals that the portfolio credit quality is reasonably high.

It is important for investors to understand that a fund with 100% AAA rated bonds is not safe from credit rating changes. The NAV will fall if an AA+ rated bond is downgraded to AA- (or AAA to AA), the NAV will fall. As long as the fund manager does not wait for further downgrades and gets rid of the bad bonds before there is an actual default, the fund will recover. We should be aware or risk, not run away from it.

Here are a couple of snapshots from the Franklin India Savings Plus Fund factsheet

Franklin India Savings Plus Fund
February 2016
Franklin India Savings Plus Fund
February 2017. Notice the low expense ratio.

Average portfolio maturity and modified duration history

For a normal debt fund,  the average maturity profile of the bonds in the portfolio and a quantity known as the modified duration provide a measure of how sensitive the fund will be when interest rates change.  Higher the average maturity, higher the modified duration and higher the fluctuations when rates change.

In a floating rate fund, this dependence is not so exact as the market value of a floating rate bond is not as sensitive to rate changed. Here is a history of both quantities for this fund.

Although they change from month to month, the values are still comfortably lower. The credit quality for each of these months was also reasonably high.

Franklin India Savings Plus Fund Daily NAV change

It is important for debt mutual fund investors to recognise range over which the daily NAV can vary.

While most variations are positive and around + 0.02%, there were some wild variations, especially during the July 2013 bonds crash. The advantage with low average maturity is that the recovery will be faster.

Franklin India Savings Plus Fund Rolling 1 year returns

Around 2400 1-year returns from April 2006 to Mar 2017 are plotted above (blue) and compared with a liquid floater fund. Notice that returns can swing quite a lot. So I would peg my expectations at about 6-7%.

The fund has no exit load but has a first investment requirement of 10,000, followed by 1000 and above.  I would recommend using it for any duration above 1 year.

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3 thoughts on “Franklin India Savings Plus Fund – A Debt Fund For First-time Investors?

  1. Kishore Rao

    Franklin India savings plus fund as per its current portfolio (VRO) has roughly 5% of its investments in A and lower securities and 20% in AA. 75% of its portfolio is in Sovereign, AAA, A1 and cash.

    Do you think a fund which has at least 80% or more of its portfolio in AAA or equivalent or above, in all months for the last three years can be a better choice from the credit risk point of view?

    Reply
  2. Rajesh

    Dear Pattu Sir,

    The timing of this post has been impeccable (for me), as I was confused about picking a debt fund.

    I have to build a fund equivalent to 6 months of salary, to take care of a job loss scenario around a year later (as I work in a startup and I hope this fund would give me the time to consider my options). I can invest only monthly rather than lump-sum. If the startup succeeds, I plan to stop investment, but maintain this as a near-term contingency fund as long as I work (only topping it up to maintain the 6 times my monthly take-home salary requirement)

    Considering a fund that should not be too volatile when a need comes, I wanted to choose a debt fund.

    Just before reading your post, I had considered 'Reliance Money Manager Fund' (which has an associated HDFC ATM debit card allowing withdrawal of up to 50%). Between Reliance MM Fund and Franklin India Savings Plus Fund, kindly help me understand which would be a better fit for my specific need?

    Is there any other fund you would suggest?

    What could be the tax implications?

    Thankyou very much in advance,
    Rajesh

    Reply
  3. Rajesh

    Dear Pattu Sir,

    The timing of this post has been impeccable (for me), as I was confused about picking a debt fund.

    I have to build a fund equivalent to 6 months of salary, to take care of a job loss scenario around a year later (as I work in a startup and I hope this fund would give me the time to consider my options). I can invest only monthly rather than lump-sum. If the startup succeeds, I plan to stop investment, but maintain this as a near-term contingency fund as long as I work (only topping it up to maintain the 6 times my monthly take-home salary requirement)

    Considering a fund that should not be too volatile when a need comes, I wanted to choose a debt fund.

    Just before reading your post, I had considered 'Reliance Money Manager Fund' (which has an associated HDFC ATM debit card allowing withdrawal of up to 50%). Between Reliance MM Fund and Franklin India Savings Plus Fund, kindly help me understand which would be a better fit for my specific need?

    Is there any other fund you would suggest?

    What could be the tax implications?

    Thankyou very much in advance,
    Rajesh

    Reply

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