Coronavirus fallout: Rs 25,800 crore investments at risk as Franklin Templeton shutters six schemes

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Published: April 25, 2020 1:45:50 AM

Debt schemes of mutual funds for long have been seen as low risk, but shuttering six schemes and leaving investors in a lurch will impact investor sentiment.

“Mutual funds have been facing unprecedented liquidity challenges in this situation and while it is absolutely necessary to address the spread of the contagion, it is causing significant issues for the liquidity in the markets,” said Sanjay Sapre, president, Franklin Templeton – India.The members of the Association of Mutual Funds in India took plains to explain that this was not an industry-wide phenomenon.

Approximately Rs 25,800 crore worth of investments are at risk with Franklin Templeton winding down six of its debt schemes on Thursday. Investors will not be able to redeem their investments nor will the fund house take in any fresh investments. Explaining the decision, Franklin Templeton Group (India & CEEMEA) managing director Vivek Kudva said, “This was not an easy decision for us and the parent also, as it will have an impact on the brand, franchise and so many things.”

The fund house took pains to explain to investors on Friday that the teams managing other schemes were different even as the management was evaluating its entire portfolio of investments. The members of the Association of Mutual Funds in India took plains to explain that this was not an industry-wide phenomenon. Debt schemes of mutual funds for long have been seen as low risk, but shuttering six schemes and leaving investors in a lurch will impact investor sentiment.

While admitting that these funds should have provided on-demand liquidity, the management of Franklin Templeton said that it had decided to ‘wind up’ the schemes to preserve the value of the portfolio that was getting eroded due to redemptions and mark-to-market losses amidst market illiquidity.

Kudva further said, “For investors, the message I want to send out is that the outcome is not good, but we believe this is the right thing to do. We would return maximum value to investors and many of you would be angry and disappointed, but I request you to judge us on the basis of how we return the money eventually.”

The fund house attributed the decision to close the funds on redemption pressures, mark-to-market losses and illiquid market conditions caused by the novel coronavirus pandemic. The fallout of this event is expected to also impact the parent of Franklin Templeton negatively. The schemes closed down by the fund house include — 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.

Details of the winding up process will be communicated to existing unitholders of the funds impacted by this decision at the earliest. The funds will continue to publish their net asset values daily, and investors will not be charged any investment management fee on these funds, going forward. Units of the funds will no longer be available for purchases and redemptions.

“Mutual funds have been facing unprecedented liquidity challenges in this situation and while it is absolutely necessary to address the spread of the contagion, it is causing significant issues for the liquidity in the markets,” said Sanjay Sapre, president, Franklin Templeton – India.

According to the Franklin Templeton MF, some categories of funds which have been closed down have direct exposure to higher yielding securities across the credit rating spectrum and the security rated below ‘AAA’ have been most impacted by the ongoing liquidity crises in the market. Subject to compliance with applicable regulations, the trustees, with the assistance of the investment manager, will proceed with orderly realisation and liquidation of the underlying assets, with the objective of preserving value and distributing proceeds to unitholders after discharging any liabilities of the funds. The fund house said that impacted investors should contact their advisor to discuss financial and tax implications.

Funds having the shortest duration would be liquidated at the earliest while other funds be liquidated in accordance with their durations. “At this point it is value destructive to actively sell the securities in the market. The yields are very high and you are not able to do right price discovery. Once the pandemic situation improves and liquidity returns in the market then we will actually look at actively selling the portfolio,” Sapre explained.

Blaming the Covid crisis for the illiquid market and heightened risk aversion in money markets, especially for the below ‘AAA’ rated papers, the management team said that the teams managing these six funds would continue to actively look at exiting the portfolio of investments to return the money to investors. Commenting on their other debt and equity funds, the management said there were separate teams managing other assets and that investors should not worry about those portfolios.

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