All you wanted to ask about your debt mutual funds after Franklin Templeton fiasco
What happened?
Franklin Templeton Mutual Fund has decided to wind up six debt mutual fund schemes. Investors in these schemes will not be able to buy or sell these schemes anymore. No SIP/STP/SWP will work on these schemes.
Which are the schemes?
The six schemes are: 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. These schemes manage assets worth Rs 26,000 crore.
Why is the company doing it?
“Significantly reduced liquidity in the Indian bond markets for most debt securities and unprecedented levels of redemptions following the Covid-19 outbreak and lockdown have compelled us to take this decision,” said Sanjay Sapre, president, Franklin Templeton India.
What does it actually mean?
The company is not able to sell its investments because there are no takers in the market. The current uncertain situation in the economy and the market has made investors extremely risk averse. They want to play it safe and do not want to buy lower-rated and unrated papers. The fund is not able to sell investments to meet the redemption pressure.
That means I will not be able to sell my investments?
Yes, you will not be able to sell your investments. You will have to wait for the fund house to sell its assets and pay the money back. The basic idea behind the decision is to avoid distress sale to meet redemption proceeds. If the liquidity in the debt market improves, the fund house would be able to sell its assets and pay your money.
How long should I wait?
It is difficult to say. Most advisors say the average maturity of the schemes might offer an indication. However, do not count on it, as everything depends on the conditions in the debt market and whether the fund house manages to sell its holdings.
What about my investments in other Franklin Templeton schemes?
Avoid knee-jerk reactions is the standard advice offered by mutual fund advisors. Look at each scheme, look at the portfolios carefully, before taking a call. Basically, you should look whether you are okay with the risk element in the portfolio. Keep in mind that risks might get magnified in the coming days in the debt market. So, play it very safe.
Will it hit my other debt mutual fund schemes?
Yes, the Franklin fiasco is likely to have an adverse impact on the entire debt mutual fund scenario. Most experts believe many investors are likely to get nervous and redeem their debt mutual funds in a hurry. It will put extra pressure on the debt market. Though nobody is sure about the extent of the impact, advisors are asking investors to be extra cautious and watchful for the next couple of weeks.
What should I do about my other debt funds?
You must revisit each of your debt mutual funds and find out whether you are okay with the risk in their portfolio. Keep in mind that the Templeton fiasco would hit the debt market very hard. The economic lockdown and pandemic crisis would also keep the market on a tight leash. So, do not take any extra risk than you can afford.
Is there a broad advice?
Most mutual fund advisors are asking investors to stick to overnight funds, liquid funds, banking & PSU funds, and corporate bond funds. Some advisors are also okay with a few select low duration and short term schemes.
Should I sell my entire debt funds and stick to bank FD?
That is what many mutual fund investors are asking their advisors. The standard advice is to avoid all unnecessary risk and stick to mutual funds with better credit quality. Look for red flags like investments in lower rated papers, borrowed money, etc, and weed out schemes with high risk. If you are an ultra cautious investor, you should invest only in overnight funds as they have the least risk.