Franklin Ultra Short Bond Fund down by 4%! What to do next?

NAV of several Franklin Debt fund including, Franklin Ultra Short Bond Fund is down by 4-5%. This is possible due to a write-down of Vodafone Idea bonds A look at what investors should do now.

Franklin Ultra Short Bond Fund down by 4 percent what to do now

Published: January 17, 2020 at 11:05 am

Last Updated on

In what appears to be an internal re-rating (write down) Franklin has devalued its Vodafone Idea bonds. Hence the NAV of Franklin Ultra Short Bond Fund is down by 4%! Othe Franklin funds such a Franklin Low Duration Fund, Franklin Income Opportunities, Franklin Credit Risk Fund etc are down similar extents. A look at what investors should.

Update Jan 24th 2020: Crisil has now rated Voda Idea bonds BB. This is now below investment grade. It will be interesting to see how AMCs react to this. It should be noted that Franklin has not fully written down the bonds. The future payments have not been included in the write-off. We shall update this article with relevant developments.

Update Jan 25th 2020:  Franklin has now announced segregated portfolios in Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund. Also see: Was Franklin AMC right in marking down Vodafone Idea Bonds?

Update 17th 2020: Franklin has clarified that they have written down only the realization price of the bonds and not the amount repayable by Vodafone.

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Debt securities of VIL held in the schemes of FTMF have been marked down to zero. The valuation adjustment only reflects the realizable price of the relevant securities on the date of valuation and does not indicate any reduction or write-off of the amount repayable by VIL. The schemes will continuously monitor the developments
in VIL and take appropriate steps to recover the investment proceeds in the best interest of its unitholders

My understanding is that it means further interest payments by Vodafone, if received, will be added to NAV. If there is a recovery, the NAV should recover fully but time lost will reduce returns.

List of affected Franklin Debt Funds by the Vodafone write-down with losses

  • Franklin Ultra Short Bond Fund -4.4%
  • Franklin Credit Risk Fund -4.9%
  • Franklin Income Opps Fund -5.1%
  • Franklin Dynamic Accrual Fund -4.3%
  • Franklin Short Term Income Fund -4.6%
  • Franklin Low Duration Fund -6.9%

Changes in max investment amounts of affected debt funds

Franklin has restricted Fresh/additional purchase (including switch-in, SIP & STPin) by an investor on a single day across Plan(s) under the above schemes to Rs. 2 lakh. Source: AMC Circular

What should investors do? Nothing for now. The loss if written-down is permanent. Even if there was a credit downgrade to default and a side-pocket with recovery monthly later, the loss is permanent due to the time value of money. See: Delay in EPF interest payment: Is there a loss to subscribers?

Did Franklin do the right thing by not waiting for the downgrade? Absolutely. It is a smart move and they can get rid of this and move and make up for the loss in future instead of side-pocket complications. Investors should take the loss, take the lessons and hold on to the funds if they can wait or move back to “safer” instruments like FD/RD.

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  1. Pattu Sir, can you explain why proactive downrating of a bond is good for the fund investors, much before the rating agencies downgrade it (which is imminent due to SC ruling in this case), unless they actually physically dump those bonds out of the fund and recover what ever is possible. Otherwise, now they probably are showing in the books (and hence in NAV) an asset much lesser than what the market is still perceiving it to be. Even UTI built into the NAV for the default by DHFL in their debt funds and NAV dropped like a stone by about 5 & 8.5 % in couple of their debt funds, due to their over exposure to these bonds, but that was once it was known that they have started defaulting on interest payments. I am missing the point here.

  2. Thanks for the details, you are the only one who has written about it so far online… I just invested in one of Franklin’s Debt fund this week and boom today this happened 🙁

    1. If it is long term, 5-7+ yrs, and not in a retirement mode, then equity is the best. It’s transparent unlike debt funds.
      This particular fund has been always risky but a darling of investors and so called experts, all for that extra 1% gain over the next best fund in this category.
      There are less riskier options available in debt funds for 3 yr timeframe and people should choose NOT based on returns alone.

  3. What Bad luck lol i just topped up in it a few days ago. I was a bit scared and was checking the Vodafone component in it in December and thought of a redemption. I got a bit easy last week and invested again. Better now then later.. should we be careful with other Funds that hold Vodafone. That might come under the hammer too. UTI credit risk has 9% exposure.

  4. What if Vodafone doesn’t go bankrupt and secures some relief? Will Franklin ultra short term fund mark it up again? Or will they transfer the bad paper onto their own books at zero price and keep all the profits for themselves?

  5. Can we invest further so as to compensate the loss when nav catches up. I was also told that they have high yields which will compensate this downside.

  6. This was bound to happen. News was there already since last 2-3 months.
    Surprisingly this fund continued featuring in plumbline of funds. Not sure why.
    No matter what disclaimers are added, is the risk worth?
    Why should someone invest in such risky fund in spite of the fund holding low rated papers for so long.
    Plumbline should have stopped listing this fund.
    Strange really.

  7. According to Manon Nagpal’s tweets New Investments in affected FT funds by restricting to 2 Lakhs/day/per fund.
    I am deeply affected.

  8. Sir ultra short bond funds supposed to invest max 90 days as I heard. Everyone knows Vodafone is in bad shape. Why Franklin has cheated the customer. The lessor learnt very hard way don’t trust debt funds for 1 or 2% compare to fd

  9. sir, would like to know can we expect more problems from vodafone or any other fund. Kindly let me know as hard earned money invested in the short term as well as ultra short term fund. Please reply sir.

  10. 5* fund, a good fund house and 5* fund manager. Its a good learning for all investors including me. I am still invested.

  11. How is it a good move? Side pocket complications for whom? The fund house? If it’s so then they are not acting in the interests of existing investors. So if the NAV is to recover in a couple of months, then some smart HNI investors will benefit by investing from today.
    What’s the use of holding on for existing investors if they may not get back the full money even if the dues are recovered fully,?

    1. See, one has to be little vigilant. This is the best fund in this category and despite of taking additional risk & offering more than 200 BPS return , still it managed no shock in 2018 & 2019 where other funds delivered one by one in plenty .

      But vodaphone investment was little doubtful and possibly they thought they will be thro with maturity without pain on this account. ( may be they missed it by few weeks / couple of months and remember Vodaphone still yet not defaulted on payment obligation yet )

      I had a very close watch on this fund since i had very big exposure. completely withdrawn in Nov 2019 as this write off was imminent.

      I am getting back to the fund today after write off but yes with small amount.
      But overall i had a very good return with this fond when i decided to move from equity to debt in Oct – Nov 2017.

      1. Its a very good decision on your part to redeem and move out after sensing trouble. But I am still trying to understand why Franklin has written off the bonds instead of segregating the portfolio. We are looking at 4-6% in various funds which is by no means a small amount.
        The only reason I can think of is that if people start redeeming the good part after segregation, the kind of low rated bonds the funds hold will probably sell for less triggering more losses even on the good part. Its not as if they hold plenty of AAA bonds which can be sold easily.
        The hope we all have is that they are talking to Vodafone to try and get the bonds repaid.
        We will know by 23rd whats going to happen

  12. I noticed a huge loss in my investment in this fund….
    I didn’t expect this kind of correction in debt funds in a single day….
    If at all we can wait for recovery in Nav how long it may take….?
    Or is it better to switch to liquid funds, which i have done already in panic with 50% of my funds …

  13. Shall we remain invested in this fund or exit. If we remain invested is there any possibility we may recover at-least some of our losses. I just invested in this fund last week 🙁

  14. Dear Pattu Sir – Thanks alot for writing about this topic. I was badly looking for some info on this erosion in my Franklin Ultra Short Bond fund. Much needed information and lesson learnt on how debt funds take risk.. Thank you

  15. I invested significant amount for my retirement and when my adviser alerted in Oct’19 about possible defaults from Vodafone in coming months, thought to wait for few more months as it would hit 3 years and gets tax advantage. It just hit hard because suffered big time in midcap and smallcap meltdown in 2018 & 19. Consecutive 3 years of loss is really frustrating.

  16. Hi sir,

    I have investment last month 5.5 lac. In that case what should I do. Should I redeem my money or keep the money. I have lost 25k today.

  17. Sir,
    Manish Nagpal tweet today says more funds from UTI & Nippon have marked Voda exposure to zero.
    I am planning to book STCL in FT fund and adjust against LTCG in Equity Fund since Markets are high.

  18. The AMC has not acted in interest of existing investors at all.
    They could have created segregated folios.but they have acted very shrewd way. They were afraid if creating segregated folios, people will redeem the scheme from the good folio.
    By writing off, investors are stuck, because if they leave they loose their chance of recovery.
    Also they have kept new investment open, so % of recovery will also be less for existng investors.
    I feel the AMC has done a very shrewd act and trying to disguise it as “good for existing investors.”
    We all should raise the issue with AMC and also raise complains to SEBI through their AMC grievance portal

    1. Yes I am with you. Pattu sir and Dhirendra Kumar from value research should create lot of awareness the risks involved. Seems fund managers or AMC can compromise a lot as Vodafone is in distress in long term and they should have secured. Seems Franklin not acted any with diligence keeping in the mind of existing investors. They tried to keep safe guard themselves and their expenses at the cost of investors

      1. When you invest in this one you should know your capital is at risk(due to high risky papers). If you you were so prudent you would have exited in December 2019.
        Now what AMC has done is excellent , if they had not done so the guys who have huge exposure would have withdrawn tons of money and the AUM would have fallen. The AMC cannot sell Vodafone so they have to sell other good papers. So what happens , exposure for us from 4% will go to 6 or 7 or 8% or more, so even more loss.
        Now Patttu was very clear “Walking on Fire” but i still wanted the thrill of it. After loosing money i am thinking i have been a fool, but that is life.

        There are have been a lot of indicators for me but i did not act on it. if you dont heed to it no one can help

        Blaming AMC is no good way of dealing this

        PS: From what i understand you cant segregate unless the papers are downgraded, if AMC waited for that the exposure to Vodafone would have increased due to withdrawals.

        Lets see if Voda gets a lifeline(by extension/part payment etc) and we get our money back

  19. Still not getting an answer, what should we investers do now? Remain invested or withdraw fully? Please someone answer

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