The Franklin Templeton fund closure has not only taken investors by surprise, but has also made them concerned about their investments.
Many risk-averse investors prefer to invest in debt funds because they are considered relatively safe compared to other types of funds, like equity funds. However, the Franklin Templeton episode has not only taken them by surprise, but has also made them concerned about their MF investments.
Industry experts say that the decision of Franklin Templeton Mutual Fund to wind up their 6 high-yield debt schemes has arrived as a shock to the entire mutual fund fraternity and clearly is a casualty of the COVID-19 pandemic. Debt markets have been facing a lot of liquidity issues over last month even in the high rates papers. In low credit papers, the liquidity pressure was higher. Franklin has always maintained its image of managing low credit high yield debt funds.
Impact on Investors
Many retail investors opted for these funds to get higher returns. However, “now that these schemes have shut down, the existing investors cannot do any transaction in these 6 schemes. At the same time, no expense ratios will be charged for these funds. Investors will get redemptions in the future when the underlying bonds mature or when they pay interest. Hence, existing investors can expect partial amount credits in their accounts if there are investments in any of these 6 schemes. But at the same time, this does not impact the entire universe of debt mutual funds. Funds with high-quality papers have seen steady growth during this period. RBI is also doing its bit to maintain enough liquidity in the debt markets,” says Amit Singh, Head, Investica.
Sousthav Chakrabarty, CEO and Director, Capital Quotient, says, “There may be withdrawal/stoppage of SIPs both in equity and debt. There will also be pressure on the redemption of existing portfolios, which may drive markets lower. For existing investors in debt funds, as redemption is stopped, how they will be paid out is still to be seen. Most likely they will be paid as and when Franklin gets its coupon payments or investments mature. But, investors will definitely get a staggered exit.”
Investors, therefore, should keep in mind that every investment which is market linked is subject to risks — be it equity, debt, gold or any other. “Many investors think that only equity is the risky investment and the rest, especially debt, are safe. That is not true. The 6 debt funds closure in Franklin Templeton Mutual Funds is a grim reminder to us of the reality that debt funds are also subject to market risks,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
Learning from Fund Closure
There are many important lessons which can be learned from the Franklin Templeton fund closure. Some of them are mentioned below:
# Investors need to ascertain their risk profile, and accordingly, invest in whichever class and particular scheme they wish to.
# Within debt also, there are various classifications – gilt, corporate debt, income, floating, long term, short term and liquid options. Depending upon their risk profile, investors can and should chose the appropriate schemes.
# Always examine the portfolios of any scheme before putting money in it. Scheme portfolios are available online on the respective mutual fund websites.
# Some experts are recommending investors to stick to debt funds which only invest in high-rated debt papers.
# You can also explore alternate debt strategies such as Peer to Peer lending, Venture Debt, and other opportunities related to operationally cash positive companies.
# Whenever in doubt, kindly consult a financial advisor to get your needs assessed and invest accordingly. These are uncertain times and financial advisors can help you navigate through this period.