Templeton Funds FT has added a new dimension of risk to Indian debt funds
Posted on 24-Apr-2020 Comments 0
Templeton
Funds
FT has added a new dimension
of risk to Indian debt funds
On
April 23rd, Franklin Templeton India announced the winding up of six
of its debt funds. The common thread among all these funds was that they were
all debt funds. These six funds would entail the winding up of 14 segregated
fund portfolios. The total AUM of these 6 funds is a little over Rs.28,000
crore and accounts for 25% of the total AUM of the Franklin Templeton AMC in
India.
What
this winding up entails?
The
winding up of the 6 funds by the FT group is like any other liquidation of
assets. All the debt instruments owned by these six funds would be gradually
and systematically sold by the trustees who are appointed as administrators of
these funds. Once a winding up notice is given by the fund, then effective from
24th of April all fresh purchases and redemptions in these six funds
have automatically come to a halt. Also, the payout to the unit holders will
not be immediate but will happen over a period of time on a proportionate
basis. That means if the fund is able to realize a value of just 40% of the
value of the bonds from the issuers, then that is what the debt fund investors
will get. The urgency with which the funds were wound down points to a larger
capital risk! This also means that any SIPs on these funds would automatically
be cancelled and the same would apply to any SWPs on these funds. The fund
house is yet to clarify on time lines but that will await unit holder approval.
Blame
it on COVID-19
Franklin
Templeton Fund has put the blame for the sudden decision on the liquidity
disruption in bonds caused by COVID-19. The fund was, apparently, not in a
position to handle redemption requests without resorting to an attic sale of
bonds and that would have only worsened the situation. However, that argument
looks a little hard to digest. Most of the credit risk funds in India are
heavily invested in AA rates bonds and lower. They offered higher yields but
also came with a huge insolvency risk. The decision to invest in these assets
was consciously taken. Also, investors in credit risk funds are typically HNIs
and family offices and they should have done their due diligence better.
COVID-19 was just the trigger for the action.
What
can investors do?
Frankly,
investors do not have much of a choice but to wait. If you exited ahead of 24th
April, then the redemptions would be honored. But, others will have to wait
till the assets are liquidated. Of course, ANMI and AMFI are taking up this
issue with SEBI but clearly the fund is well within its rights to summarily
wind up a fund if it is unviable. The key takeaway for SEBI may be to regulate
credit risk funds more closely to avoid any mis-selling. For the retail
investors, the message once again appears to be one of understanding risk.
After all, there is nothing like a free lunch!
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