Franklin to wind up Six Debt MFs: Next steps for affected investors

image of closed gates representing Franklin AMCs decision to wind up six debt funds

Published: April 23, 2020 at 11:02 pm

Last Updated on

In an extraordinary development, Franklin AMC has decided to wind up six debt funds due to continuous redemptions and their inability to sell adequate matching bonds. These are the next steps for affected investors.

Why did this happen? Institutional investors have been continuously pulling out money from Franklin debt funds. This has created redemption pressure. That is the fund manager was unable to sell enough bond to meet the redemptions. They borrowed cash to the extent allowed by SEBI but it appears that is not enough.

On any given day, low rated bonds are hard to sell, under the current circumstances there would be few takers for them. Hence the need to close the fund to protect existing unitholders.

Which are the affected funds?

• Franklin India Low Duration Fund (Avg maturity 1.46 Y)
• Franklin India Ultra Short Bond Fund (Avg maturity 0.51 Y )
• Franklin India Short Term Income Plan (Avg maturity 2.06 Y)
• Franklin India Credit Risk Fund (Avg maturity 3.08 Y)
• Franklin India Dynamic Accrual Fund (Avg maturity 2.55Y  )
• Franklin India Income Opportunities Fund (Avg maturity 4.28Y )

Step  1: The AMC will ask approval from unitholders for winding up the scheme as per section 41(1) of the SEBI MF Rules (page 36). Since winding is the best solution in the current climate, unitholders can agree to the winding up.

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Step 2:  The AMC has now closed the fund from all transactions. As the bonds in the portfolio mature, it will be converted to cash.  Interest on the bonds will be paid normally.

Step 3: It is better to assume the AMC will wait until the entire portfolio matures and only then distribute the proceeds to unit holders. This means it should take a few months. The shorter the average maturity profile of the wound up fund, the quicker it should be liquidated.

For example, Franklin UST investors should be patient for at least 6 months. During this time, the NAV will be published. Please take a moment to recognise a bank run-like situation is unfolding and your money is safer locked away than face redemption risk daily.

update: The AMC has announced in a mail to unitholders that they aim “to make regular payments to investors from portfolio maturities, coupon and pre-payments, once the borrowings in the funds have been paid back” also see Repayment Process pursuant to Winding-up.

Everyone one of the above six funds had suffered credit events before. An investor who is still invested in these is expected to appreciate the associated risks. Yes, Franklin did go overboard with credit risk but that is well known.

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29 Comments

      1. Yes sir, but although ultra short bond shows a MACAULAY DURATION of 0.56 years, as per fact sheet many bonds are due to mature in year 2021/22/23. so does it mean if not sold in secondary market the entire repayment of principle will be done when it matures after 1/2/3 years?

      2. So can investors get entire money back which is there as of today or how amount will it be calculated?

      3. What return to expect though? Is it going to be the amount as of today? Will it be lesser or will it be higher?

  1. Respected Pattu Sir,
    Thanks for enlightening young investors on timely basis. Please concern over this query. My segregated portfolio which has exposure in Vodafone bond is still with Franklin USB. I had redempted my investments but still segregated folio is there. When can investors expect that units cash to be hit in bank account? Please guide.

    1. I too have segregated portfolios and when contacted, FT told me that Vodafone maturity is due by Jun’20 and we will get if it pays up.

  2. Dear Sir,
    Is there a way to assess the ‘health’ of other mutual-funds e.g. Franklin India Liquid (FIL) – Direct with publicly available info?
    e.g.
    1) As per Value Research (VR) chart FIL had one sharp dip in NAV but it recovered to it’s earlier growth trajectory. What does this indicate? The NAVs of the closed MFs had large dips and rarely recovered.
    Another MF where I am heavily invested in, Kotak Bond – Short Term (KBST) Fund had two dips but also recovered.
    2) FIL data on VR shows all of FIL and KBST holdings are of High Credit Quality which is also confirmed by the list of holdings and their ratings
    3) Is the AUM data available on a daily basis? Am sure a downward trend in AUM is a sure sign of a problem.
    4) Should one switch to funds with lower average maturity and high credit quality in these times if one has retirement money invested in these funds?
    Thanks in advance!

  3. I have invested in overnight fund. Should I redeem that also…how much risk is associated with that..?

    1. Dear Ajitji, Overnight funds have only one day maturity, hence have very very low risk, but not zero risk. Under the present circumstances most overnight funds park money in RBI’s reverse repo, so the return would be like 4%. This can go down further. Better not to ‘invest’ in these funds.

  4. As more and more news coming in, my guess is that we would see the heavy carnage in most of the debt funds today and next week. Even liquid and overnight funds will not be spared. PSU banks would be the big beneficiaries.

  5. I am not really sure about Step 3 that is Fund House waiting till maturity to distribute the funds. It is not stated any where and to restore the confidence, I guess fund house will not wait till maturity of full portfolio holdings to distribute. At this point of time, partial amounts trickling in slowly is better than waiting for long time to realize the full amount.

  6. Dear Pattu,
    I am an investor in FT credit risk fund. Have some queries, would appreciate of you can answer the below question.
    • As per ToI Report, the schemes will be handed over to an Administrator.
    o Who is the Administrator? Within or outside FT? if it is ourside FT does that mean that FT has now washed its hands off?.
    • As per latest portfolio, some bonds mature as late as 2027/2028. Does that mean that we will have to wait till that time for money?

    My comments on Step 3 of your article. I believe that’s not he case. They will pay Investors on piece meal basis as and when bond mature/are liquidated. Still I too am not sure about it.
    One more point. Most of the schemes have taken loans to pay for redemptions. These loans will be paid up first and than the balance amount will be disbursed to investors. For FTCredit risk fund. AUM 3500 crores. Loan amount 450 Cr (approximate figures)

  7. I am an investor in FT credit risk fund. Have some queries, would appreciate of you can answer the below question.
    • As per ToI Report, the schemes will be handed over to an Administrator.
    o Who is the Administrator? Within or outside FT? if it is ourside FT does that mean that FT has now washed its hands off?.
    • As per latest portfolio, some bonds mature as late as 2027/2028. Does that mean that we will have to wait till that time for money?
    My comments on Step 3. I believe that’s not he case. They will pay Investors on piece meal basis as and when bond mature. Still I too am not sure about it.
    One more point. Most of the schemes have taken loans to pay for redemptions. These loans will be paid up first and than the balance amount will be disbursed to investors. For FTCredit risk fund. AUM 3500 crores. Loan amount 450 Cr (approximate figures)

  8. Hello Sir,

    I had investments in Franklin India Dynamic accrual fund.
    What is the possibility of getting money over the next few months?
    Should I expect big losses?

    Thanks!

  9. sir,
    By any chance can there be similar problems in equity mutual funds,
    regards,
    praveen

  10. Hello Pattu,
    I have two other Debt schemes (ABSL corporate, HDFC short term) in which my debt SIP goes other then this Franklin Ultra short.
    Thinking this replicate in them also , is it wise to take a good Banking&PSU fund and move the money (atleast half of it) from those 2 schemes to this one, to be on the safer side ?

  11. There may be a bigger ploy behind this:
    1) All these Franklin funds have segregated portfolio. None of the other major AMCs have segregation in these debt fund categories. Close it now..and sell/exit India later like other American AMCs
    2) People who do STPs and SWPs are the major hit…since equity market is low now…this the time to do more STP into equity funds. Money got stuck now…they cannot do STP or SWP.
    3) Atleast money is safe…without much erosion in value. Need to be happy with that.

  12. Though the UST average maturity is 0.5yrs – some of the papers they have are maturing in 2021/2022. Wanted to check how does that work sir?

    For the UST fund, this is the share of papers value & maturity I found from their website,
    2020 – 28.00%
    2021- 24.00%
    2022 – 24.00%
    2023 – 12.00%
    2024 – 8.00%
    2029 – 4.00%

    I’ve got almost 30-40% of my saving stuck in this fund. 2 big costly lessons learnt i) Too much concentration is not good ii) The Credit quality has been going down in the last 2 years – never reviewed the papers and maturity and blindly kept investing in this…

  13. Hehehe :D, I too have money invested in UST and Credit Risk and was sitting ducks all this time, and I am going to take a hit.

    On the other hand, you will have to find other funds for Plumbline now.

  14. Thanks a lot Pattu Sir! Despite of what update/new please keep posted here. That’s least I expect from you which gives maximum benefit to us in this situation.

  15. Sir ,

    I have some exposure to one of the above fund,
    A basic Qry ,
    Are MF’s really safe or just a gimmick , they say liquid fund are safe anytime you can withdraw now some freeze.
    Due to this now all will try to redeem fund’s from other fund house’s and fund house’s may block all transaction’s like Franklin .

    where to invest now
    1.Saving’s bank interest peanuts
    2.FD interest very less and tax on interest earned, returns will be same as savings account (if we are in 30% tax slab)
    3. Equities as of now -ve returns , people say long term , really don’t know how long
    4.Gold right now at peak will fall for sure
    5.PPF rates are being reduced
    6.NPS lock in issues

    regards
    Sridhar

  16. Dear Pattu,
    Firstly I want to thank you for regularly enlighting us on Debt funds university and the risks associated with each type and specific funds. Because of your articles I saves losses before even investing in Debt funds.

    You had given us early warning us about the high rated funds and the undue risk they take, while so called natural ratings agencies were glove in hand/complacent.

    The mandatory disclaimer shown ‘Mutual Funds investments are subject to Market risk… Applies to All mutual funds including DEBT funds has now become a reality due to withdrawls by FII and drying of trade liquidity in the debt market.

    Thanks
    Gautam

  17. Sir, I am invested in FT UST fund. I just want to know what if companies start defaulting to pay matured bond amount like Vodafone as they knows after all investors money is stuck and fund can default their bond amount as they did it in past as well for Vodafone.
    Kindly enlight your view on this.

  18. What are the factors by which the NAV of a Debt fund goes up in a few days after a fall? Is a loan taken by the fund a factor?
    Thanks

  19. I am glad that RBI is looking into this matter and there need to be some thorough investigation is needed while protecting the common man’s money. However never could understand the following:

    There are so many Ultra Short Funds are there in the market from various fund houses and why only redemption pressure is seen in FT UST?. None of the UST AUMs were dropped in this manner but why Franklin USBF and other debt funds?

    Luckily there are no defaults from any of the invested papers and even while, these guys couldn’t manage the cash flows?. What could have happened if there are any defaults is anyone’s imagination.

    Didn’t understand the logic behind creating segregated folios even before the maturity of vodafone/idea papers?. What was the hurry to create segregated folios 6 months in advance of maturity in anticipation of default?. Also some other fund houses too had exposure to these papers and they didn’t do any such thing. Franklin created such a big fiasco that they are so concerned about investors money and giving pat on their back for such thoughtful action.

    Are there any tip offs happened about borrowings from FT and select corporates/insiders have redeemed aggressively?

    There are some allegations that even low quality papers are invested at lower interest rates (like AA- papers invested at 8.3% yields that too from first timers ) and that leaves lot of suspicion about fund manager’s competency and also possible corruption angle?

    Even while aggressive redemptions are happening, neither they have alerted SEBI and sought the way forward to utilize other options like limiting redemptions or putting some moratorium period?

    There is no protection offered to small investors or senior citizen’s investments. Atleast they should have given some special channel to address small/senior citizens?

    There is still no clarity on how much they have borrowed and we are seeing different figures and Franklin yet to publish those figures officially?

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