How Franklin MF Debt scheme closure will affect your returns ?

Here I will try to give a perspective opinion of mine on this topic .

As you all know we have been going through an unprecedented situation of the century due to COVID19.Till couple of months back nobody have ever thought the world will stand still for so many days where the entire world will go back to decades economic wise and has to restart.

Now coming to Franklin , funds which got closed

1. Franklin Ultra Short Bond Fund – 0.62 years

2. Franklin Low Duration – 1.46 years

3. Franklin Income Opportunities – 2.55 years

4. Franklin Short Term Income – 2.75 years

5. Franklin Credit Risk Fund – 3.08 years

6. Franklin Dynamic Accrual Fund – 4.28 years

What is the implication of this ?

1. Your money is locked now until AMC will make the payments.

2. You can not Purchase,redeem , SWP and STP any longer

What is DEBT scheme ?

Debt scheme are the schemes where MF/NPS/PMS/ take investor money and buy corporate bond , NCD and papers with some maturity date . Here the word Maturity plays the game .

Different Categories of Debt Mutual Funds (India) 2020    (As per SEBI)

1. Overnight funds – holding portfolio with maturity of up to 1 day

2. Liquid funds – holding portfolio with maturity of up to 91 day

3. Ultra-Short Duration – holding portfolio with maturity 3-6 months

4. Low duration – holding portfolio with maturity 6-12 months

5. Money market – holding portfolio of money market instruments with a maturity of up to 1 year

6. Short duration – holding portfolio with maturity 1-3 years

7. Medium duration – holding portfolio with maturity 3-4 years

8. Medium to long-duration – holding portfolio with maturity 4-7 years

9. Long duration – holding portfolio with maturity more than 7 years

10. Dynamic bond – can invest across durations

11. Corporate bond – atleast 80% in highest rated corporate bonds

12. Credit risk fund – atleast 65% in corporate bonds below highest-rated bonds

13. Banking and PSU – atleast 80% in instruments issued by banks, PSU undertakings, municipal corporations, etc.

14. Gilt – atleast 80% in instruments issued by government across periods

15. Gilt with 10-year constant duration – atleast 80% in instruments issued by government across periods such that average maturity is 10 years

16. Floater – atleast 65% in floating rate instruments

So shorter the maturity period quicker is the paper to get matured and get the money back and vice - verse. Having said that there is no locking period for this . You can anytime enter and any time exit as they are open ended funds

Franklin is one of the best MF house which has a strong and successful history of debt fund returns .Till 6 months back if I would show the returns of Franklin Debt funds with other you would opt for Franklin for sure .

Generally Franklin was buying bad credit quality papers with higher returns and that is not wrong also. Because the same all do.

In the current situation when investors are asking for more sell/redemption Franklin each time going to corporate or selling the papers in the open market to someone else.

But in current situation due to heavy selling of MF, Franklin always go to corporate to sell the papers .

Here the problem is Franklin was getting money for all liquid good quality papers although at a discounted price which is loss but not getting buyer for bad credit quality papers .

Franklin has to sell good papers in order to return money to investors and unsold bad papers still in portfolio . So Franklin stopped these funds . If he continued redemption then once all good papers completed from MF, last leg investors would be in trouble sitting only on bad papers which could not be sold before maturity or for bad credit quality.

There is another option Franklin could do by borrowing money from RBI and give it to investors and later when it will get maturity , it can return to RBI. But even in such case maximum 20 percentage it can borrow . Still it can not fulfil selling pressure for the current situation.

Here I would say Franklin took a bold step in order to keep investors interest on top priority and keeping its own reputation second .

Franklin also announced  it wont charge any management charge from 23^rd of April from these funds .

So your question

Q.Is all my money Lost ?

Ans - NO,Its just segregated in a separate portfolio till maturity of the papers

Q.Can I get get all my investment immediately ?

Ans - NO

Q. So When will I get my money back at current price ?

Ans - Now Franklin will wait until all those paper get matured . Once it will get mature , it will consolidate and start paying to investors slowly as per maturity duration mentioned at the starting of the blog.

Q.What will happen to other equity and debt funds of the Franklin AMC ?

Ans: That will continue as per process defined . So no worries .

Lesson Learned from this crisis :

1. Crisis will come suddenly and without any symptom and in the mid of a bull market . Same happened in 2008 and now. So we should make proper asset allocation to our portfolio .

2. Debt funds definitely less riskier than equity funds but not safe like bank FD .Before investing in such Debt funds one should look the paper quality and quantity that it has . For emergency you can consider liquid funds(Govt T bills) but not these funds .

3. If you are in Debt schemes better stick to large fund houses .

4. Don’t believe in star rating of the funds because all these Franklin funds are always in the top quartile in their respective category . Better seek a adviser help before entering into Mutual Funds .

5. Hope SEBI will do its homework and come with some strict regulation again.

Disclaimer :

I have never advised or asked any of my investors to invest in such funds .Even I personally stay away from these funds. Hence my writing might be biased .