Franklin MF shuts 6 debt schemes over redemption pressure, liquidity crunch

MF distributors fear investors could start to withdraw their investments in large quantum from debt schemes, following Franklin Templeton's move

Franklin Templeton Mutual Fund (MF) on Thursday decided to wind up six of its debt schemes oriented towards high-yield investments -- with a combined asset base of Rs 25,856 crore -- citing continued redemption pressure and lack of liquidity in the debt markets amid the lockdown and the coronavirus pandemic.

According to industry sources, Franklin Templeton MF had over Rs 3,000 crore of borrowing.

“In the current environment, it has been difficult to generate liquidity, especially for credit papers, which are low on the credit curve,” said Sanjay Sapre, president at Franklin Templeton MF. 

As the cost of generating liquidity in such funds would have had a negative impact on the existing investors, the fund house decided to take the call. “Significantly reduced liquidity in the Indian bond markets for most debt securities and the unprecedented levels of redemptions following the Covid-19 outbreak and the lockdown have compelled us to take this decision,” Sapre said.

The schemes being wound up are Low Duration Fund, Dynamic Accrual Fund, Credit Risk Fund, Short Term Income Fund, Ultra Short Bond Fund, and India Income Opportunities Fund. As a result, investors will no longer be allowed to make fresh purchases or sales from these funds. The systematic plans, including systematic investment plans, systematic transfer plans and systematic withdrawal plans will also be suspended.

Market participants fear that the current situation can also impact other debt schemes. “Unlike banks, MFs don’t have the same manoeuvrability on their liability side. Tomorrow, investors can suddenly turn up and seek large redemption requests, which can impact debt schemes, given the current illiquid environment,” said Dhirendra Kumar, chief executive officer of MF tracker Value Research. 

“Franklin Templeton MF’s problem started when their credit call went wrong on Essel, Voda idea, ADAG group kind of exposures. Their illiquid portfolio couldn't manage redemption pressure forcing them to borrowing. Finally they had to take the drastic step of winding down their funds. This is exactly opposite to many other fund houses,” said chief executive of a fund house.

“The fund house went to market recently to sell convertible debentures of a bank that was trading at 6.25 per cent. However, the market realising the desperation of the fund house was offering to buy at 8 per cent,” the executive added.

“Franklin Templeton MF has deep retail penetration and some of the funds were popular among retirees, given the potential high yield generation,” he said.

Industry participants say Franklin Templeton MF’s funds were popular among retirees given the higher-yield returns they could garner by investing in relatively lower-rated papers. 

According to industry participants, the redemption pressure has continued in April and created pain points in the Rs 22-trillion MF industry.

Meanwhile, MF distributors fear investors may start to withdraw their investments in large quantum from debt schemes, following Franklin Templeton’s move.

“Winding up of schemes suddenly puts brakes on withdrawals for investors, until and unless the fund is able to liquidate all its holding,” said a Mumbai-based independent financial advisor.

“The cash flow for investors will be affected. With the benefit of hindsight, the situation could have been managed better, especially the concentrated investments made by Franklin Templeton MF,” said Amol Joshi, founder of Plan Rupee Investment Services.

The FY20 March redemption pressure on debt mutual funds (MFs) was the highest for the closing month of any financial year. A combination of hardening yields amid selling by foreign institutional investors and the redemption pressure from corporate treasuries seeking to conserve cash in view of the lockdown led to Rs 1.94 trillion exiting in March.

The high redemption pressure forced several debt funds to also borrow funds from banks to give exit to investors. As of March 31, 2020, Franklin Short Term Income Fund had 17.7 per cent of assets as net liabilities. Franklin Low Duration Fund and Franklin Ultra Short Bond Fund had 12.7 per cent and 7.1 per cent of scheme assets, respectively, as net liabilities. 

Market participants say the full redemption of the funds can take six-12 months. Sapre said the fund house will try to make payouts to investors on a staggered monthly basis.