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.

Published on / By M. Pattabiraman Twitter: @pattufreefincal / 29 Comments

Published: January 17, 2020 at 11:05 am

Last Updated on June 3, 2022 at 11:12 pm

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?

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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.

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.