Franklin Templeton to close six India funds; first instance of fund house shutting schemes due to coronavirus triggered crisis

The coronavirus pandemic gripping across the globe has led to industry taking important and far-reaching decisions. In an unprecedented move, Franklin Templeton Mutual Fund has voluntarily decided to wind up its six debt schemes citing redemption pressure and lack of liquidity in bond markets due to coronavirus pandemic, according to news reports.   This is the first instance when a fund house is shutting its schemes because of coronavirus-related situation. Franklin Templeton Mutual Fund on Thursday announced it would wind up six yield-oriented, managed credit funds in India, effective April 23, citing severe market dislocation and illiquidity caused by the coronavirus. The funds included 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, it said. “The decision has been taken in order to protect value for investors via a managed sale of the portfolio,” the Fund said in a statement.

Franklin Templeton Conference Call | Started seeing increasing issues w.r.t liquidity during #Lockdown. Don't expect bond market to return to normalcy anytime soon; winding up schemes was the only way to combat current situation pic.twitter.com/QhMwXBP1Zd

— CNBC-TV18 (@CNBCTV18Live) April 24, 2020

“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 lockdown 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,” Franklin Templeton MF said in a late evening statement on Thursday. The decision was limited to funds which have “material direct exposure to the higher yielding, lower-rated credit securities in India that have been most impacted by the ongoing liquidity crisis in the market,” the statement said. The statement further noted that “an event has occurred, which requires these schemes to be wound up and that this is the only viable option to preserve value for unit holders and to enable an orderly and equitable exit for all investors in these unprecedented circumstances”. Market participants are concerned that the current situation may also impact other debt schemes. Markets regulator Securities and Exchange Board of India (SEBI) on Thursday eased the valuation policies for debt mutual funds and asked them not to term a paper as default if the delay in payment of interest or extension in maturity is mainly due to coronavirus pandemic related lockdown. Amit Singh, Head, Investica, the online mutual fund platform of Choice Broking said, “the decision of winding up their 6 high yield debt schemes came as a shock to the entire mutual fund fraternity. This is clearly 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. Many retail investors opted for these funds to get higher returns. 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 six 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. Our recommendation to investors is to stick to debt funds which only invest in high rated debt papers. Please 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,” Singh said. --With inputs from agencies