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Why Franklin Templeton India Closed 6 Debt Funds?

  April 26,2022

Dear Investors,
In the past few days, you might have read news from numerous sources about Franklin Templeton MF winding up 6 of their credit risk funds.

I would try to provide an explanation in a simple language to all my clients, so that you can understand easily what needs to be understood in this difficulty.

  1. In mutual fund there are two categories of funds – Equity & Debt, I always endorse only Equity and not debt. All the 6 funds which are wound up belong to Debt category, so you – the equity investors, do not have a decimal of hassle in this issue. I hope this itself will give greater confidence to continue through further.
  2. It is a generalized belief among all, that equity is a Risky zone while Debt is a safe haven, that’s actual in lots of activities, however not always. Can this occurring be an eye opener? we shall discuss now.
  3. Amongst equity, in case of any unforeseen challenges in a specific stock, the impact will be only on that stock while the rest can deliver the fullest liquidity. Redemption can be made within 4 days, based on that day’s NAV, the money will hit the bank account directly.
  4. At the same time if the debt papers (in which debt fund manager invested) defaulted any of their interest payments, then there will be some mark down. When the equity markets are nose diving because of COVID 19, the other asset class which can be easily liquidated is only debt. There was a non-stop redemption due to the fact that many corporate and HNIs have to pay the salaries and rent, so they should take out their money. This additionally is one of the triggers of this event.
  5. As far as Franklin Templeton MF is concerned, high risk appetite beyond the permissible limit had been their feature for these many years. They have been managing their debt funds reasonably well, though they are taking excess risk than their peer group. As long as they are able to deliver the returns, it has been the most sought-after fund house among advisors as well as investors in the debt class of funds.
  6. Now, they have left with two choices. (i). They can sell the debt papers at throwaway price and they can keep honoring all the redemption of their investors, but there will be huge erosion of principal component. In this process those who don’t want to redeem and stay invested till maturity will also get affected. It not only creates turbulence for Franklin but the seismic action penetrates into every other fund house too. (ii). Since the bonds are due for payments in different maturity periods, the fund house will liquidate the investments as and when it matures and distribute the proceeds to the investors. Though it is very painful & time consuming, still this is the better option I believe, since the investors can get back their principal as well as the interest.
  7. Debt investment is always seen and believed as a risk free, safe class of investment. Most of the people tend to overlook the inherent risk of this investment be it fund house, fund manager, advisor and investor. Lockdown now adds fuel to the fire, making the nightmare to reality.
  8. I would like to underline here that in equity markets you have the liquidity all the time, irrespective of the market scenario. But the value is drastically low today due to this medical crisis turned market crisis of COVID 19. So, the well-informed long-term investor will never redeem unless otherwise it is desperately needed. At the same time these 6 debt funds under discussion have absolutely NO liquidity and it is completely ceased, while the chances of recovering the money are possible.
  9. While making investment it is the utmost responsibility of the investors to not only look at the recent returns, past track records but also should possess a vision about its performance after 5 years. Many times, it has become difficult for the investors to make this assessment. For this, definitely one need a financial consultant, no online will help!
  10. Lastly, I wish to assure all my investors not to worry for these kinds of market ripples as none of my clients are exposed to any debt investments. So, I advocate all my clients to instill the need of understanding the risk lying latent behind these forms of investments whenever you interact with your near & dear one.
  11. This is difficult times for everyone, let us first focus on how to ride peacefully during this lock down and do not allow your mind to think about what will the future unfold, even if you try you will not get the answer.

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