Franklin Templeton locks up Rs 26,000 crore across 6 schemes

Mutual fund investors owning up to Rs 26,000 crore were left in a lurch after Franklin Templeton Asset Management, in an unprecedented move, decided to wind up as many as six high-risk mutual fund schemes. This has led to analysts advising caution.

As on date, the six schemes -- 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, Franklin India Income Opportunities Fund -- collectively had Rs 25,856 crore assets under management (AUM). All these schemes were high-risk, high-return schemes -- with many high net worth individuals (HNIs) investing in them.

CORONAVIRUS SPECIAL COVERAGE ONLY ON DH

The move came after the six schemes saw redemption worth Rs 4,997 crore in just 22 days, amid rising coronavirus cases. At the end of March, these schemes had an AUM of Rs 30,853 crore -- making up 1.4% of Rs 22.26 lakh crore of mutual fund industry's total AUM.

The company attributed the phenomenon to the growing credit concerns from the coronavirus pandemic and the resultant lockdown.

"There has been a dramatic and sustained fall in liquidity in certain segments of the corporate bonds market on account of the COVID-19 crisis and the resultant lock-down of the Indian economy which was necessary to address the same. At the same time, mutual funds, especially in the fixed income segment, are facing continuous and heightened redemptions," it said in a note. As a result, the investors in these schemes won't be able to buy or sell the units of these six schemes.

The fund house said that it will dispose of the underlying assets in all the six schemes. "The sale proceeds after the discharge of all liabilities and expenses will be paid to the unitholder(s) in proportion to their respective interests in the assets of Schemes," it said.

There are apprehensions in the market that due to the slowdown, there could be more defaults. In uncertain and fearful times, investors become risk-averse and stay away from low credit-rated companies, which is usually considered a foray of the Templeton funds.

To meet redemptions, the fund house either dips into its cash reserves or sells its underlying scrips. With the markets frozen and everything being sold at a discounted rate, the move to sell the underlying security may have resulted in heavy losses by the Franklin Templeton.

"The implication on shuttering 6 funds is a clear lack of liquidity of investments and inability to meet redemptions. In this scenario, investors would be well advised to look at the credit quality of their fixed-income investments especially if the lockdown continues," says Anubhav Srivastava of Infinity Alternatives.

There are worries that this would lead to an outflow of funds from similar high-risk schemes in other fund houses as well.

Many others are also advising investors not to go after the high-return debt funds in the current market situation. "In fact, they should not be chasing yields and returns since that always comes with the risk of elevated credit risk," says Jimeet Modi of Samco Securities.