Franklin Templeton Debt Fund Fiasco And Decoding of Key Take Away


Franklin Templeton Debt Fund Fiasco & Decoding of Key Take Away

Apr 24, 2020
FT India announces winding up of its six debt funds (Mutual Funds).
Fund Name & AUM (Asset Under Management)
1.     FIUBF – Franklin India Ultra Short Bond Fund – AUM Rs 9679 cr
2.     FILDF – Franklin India Low Duration Bond Fund  - AUM Rs 2389 cr
3.     FISTIP – Franklin India Short Term Income Plan - AUM Rs 5658 cr
4.     FIIOF –  Franklin India Income Opportunity Fund - AUM Rs 1855 cr
5.     FICRF – Franklin India Credit Risk Fund - AUM Rs 3527 cr
6.     FIDAF – Franklin India Dynamic Accrual Fund - AUM Rs 2541 cr
Apr 27, 2020
RBI announced Rs 50000n cr Liquidity Window for MFs

On Apr 24, 2020 Indian mutual fund industry witnessed first of its kind crisis, when Franklin Templeton India operations announced winding up of its six debt funds (mutual fund) scheme. The event which caused shiver through the spine of many mutual fund investor in specific and all investors in general. And the news made dreadful headlines, chiefly because of normal perception that debt fund provide steady income (return) along with safety of principal (Invested money). This all happened amid the Covid -19 pandemic. So the RBI came up with Rs 50000 cr special liquidity window on Apr 27, 2020 to calm down the ongoing fear in the market.
What caused this failure at Franklin Templeton (FT)
At FT India, the nixth largest fund house in india, these debt funds were managed by Santosh Kamath, a star Fund manager and the CIO (Chief Investment Officer) for fixed income fund at FT. Mr Kamath is known for his investment style on below AAA rated debt instruments, which used to provide high return on investment in comparison to similar AAA rated debt instruments. And he has in this way outperformed most other debt funds for years. But, there is coherent credit risk is also attached with such debt instruments.
The investment ranges from less known institutions to fullest subscription of unknown entities like Rivaaz Trade Ventures where total Rs 644 cr were put in. And that is not the only case, FT was the only lender to 26 entities out of the 88 entities in whose bonds it invested. These investments were largely low graded and ill liquid while the debt funds were open eneded. And all these were done having perception “Higher the risk, higher the return” meant to meet disaster. Only surprise is it took it so long to meet its fate.
Winding Up & Investor
Winding up simply means Investors who have invested can not withdraw their fund as of now. These are debt schemes and so the money is invested in instruments like corporate bonds and securities and not stocks. So now, the FT would try to get back the money invested by two ways either wait for maturity of the instrument invested in or resell the underlying asset in the secondary market. In both the ways, it is expected to face hurdle in coming days. If macroeconomic situation remain the same, as it is at present amid Corona Pandemic. However if the situation improves and market goes buoyant, they may get better opportunity and investor early and better settlement of their funds.
Key Takeaways
1.     Higher the risk does not guarantee higher the return.
2.    Debt Fund does not guarantee safety of Principal.
3.    Do read details of investment while buying Debt Funds.
4.    Any investment below AAA rating in debt fund, needs to be examined. Question is do we get any fund all invested in AAA rating instruments only. So a fair portion of fund must be invested in AAA and AA.
5.    Worthy to mention that present fiasco does not mean no return to investor. Since no timeline declared for investors in this case, so they would have to be patient may be upto 5-6 years for full redemption.  

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