Franklin Templeton India Winds Up its 6 MF Schemes

The past few weeks and months have seen an unprecedented amount of turbulence in the financial markets. The latest wave of uncertainty was fuelled by the spread of COVID-19 from early 2020, which quickly took a toll on global economic growth.

In a matter of weeks, all the previous forecasts and expectations went for a toss as large economies suddenly came to a grinding halt. Something similar also happened in India and created a situation that was never imagined before. One of the undesired outcomes of the COVID-19 pandemic crisis was Franklin Templeton Mutual Fund winding up six fixed income funds.

Let us understand what led to this outcome.

COVID-19 and the sudden liquidity crunch

Till the time the Indian and the global economic activity was on its natural course, multiple entities were raising money from the financial markets through bonds. Mutual fund schemes, including the ones offered by Franklin Templeton, also subscribed to bonds across the credit spectrum.

However, with the sudden change of course for the Indian and global economy, a fundamental dynamic of the market – liquidity – was immediately impacted. The debt papers or bonds that were being traded normally until then could not exchange hands at reasonable prices suddenly, as the COVID-19-related paranoia spread everywhere.

At the same time, with the economic shutdown, courtesy of the preventive lockdown, mutual funds saw a sharp rise in demand for redemption from the investors.

Typically, when an investor in a scheme seeks redemption, the fund house liquidates a portion of the holding to pay the investor. However, given the current situation, it became challenging for the fund house to undertake such transactions due to lack of liquidity.

The fund house even borrowed money to honour redemptions for a while, which could not continue as the extension of the lockdown and the resultant economic turmoil continued to send jitters throughout the financial markets.

The quest to save value for investors

With a lack of liquidity in the market and exploring various other options, there was only one way left to preserve the value of investments for the investors, i.e. by winding up the six debt funds. These were the Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Short Term Income Plan, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund, and Franklin India Income Opportunities Fund.

Essentially, this means two things. The first appears to be negative for a few investors in the very short term, and the second looks to be positive for the majority of investors over time. The immediate negative consequence is that the investors would not be able to make redemptions from these schemes for now.

However, the lack of liquidity also affects the demand for these assets, thus pulling down their value. Liquidating in the current market would be akin to distress selling, which is nothing but value destruction for investors. Instead, with the schemes now wound up, the fund house will make efforts to liquidate the holdings, possibly at reasonable prices.

The winding-up of a scheme does not mean that the value of investments has been written off. In fact, this means that the fund house continues to hold the underlying assets on behalf of the investors and aims to liquidate the same at the earliest reasonable opportunity. These schemes shall  continue to accrue gains from the scheduled coupon payments and maturities of the underlying securities like they would have normally. The accrual of gains for investors continues, as only the subscription and redemption in the scheme stops when it is wound up.

What happens next?

The schemes that have been wound off include short-term and some relatively longer-term schemes. The short-term schemes have short-term bonds in the portfolio. As the bonds mature, the fund house would receive maturity payments and the same will be used to make payouts to the investors post deducting expenses as per SEBI guidelines.

For relatively longer-term securities, while maturity could still take a while, the fund house would attempt to liquidate the securities at the first opportunity and repay the investors.

In fact, a prepayment is also possible once there is improvement in the market. Moreover, there can be payments to investors from the portfolio maturity or coupon payments, subject to certain conditions mentioned  under Regulation 41 of SEBI (Mutual Funds) Regulations, 1996.

You can view the maturity profile here.

The process is also being communicated to the investors simultaneously.

The Franklin Templeton Legacy

Franklin Templeton Mutual Fund has a long-standing reputation in the Indian market built on the service the company has provided to its investors over the years. The fund house has been operational in India for over a quarter of the century. A third of their global workforce operates out of India, which is a testament to their commitment.

While the decision to wind up the six schemes in question could appear to be a harsh one, it was probably the only choice left in the current scenario, as explained above. With all other operations of the company running normally, the legacy of the fund house is something that still shines bright in the face of adversity.