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

Published: April 23, 2020 at 11:02 pm

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.

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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