Franklin Templeton Mutual Fund, Indian arm of the world’s biggest fund house and one of the largest mutual fund company in the country (with Asset Under Management, AUM, of Rs.1.16 lakh Crore its ranked 9th), announced its decision to close six of its debt funds with effect from 24th April 2020. The six schemes to be closed are holding AUM of Rs.30,853 Cr. and represent almost 26% of its total AUM. The company has attributed its decision to close the schemes to the liquidity crunch in debt market caused by Covid-19 pandemic & ongoing lockdown.
What lead to Scheme closure:
Company faced continued redemption pressure in majority of its debt schemes and with liquidity drying up, especially so for lower rated debt papers, it would have had to resort to the selling of high rated papers from the schemes which in turn would have increased the concentration risk of low rated debt papers exposing the existing investor to much higher risk. Although, the company resorted to borrowings, as per the norms, to meet some of the redemptions, continued lockdown with liquidity crunch left the company with no option but to close the funds to protect the interest of remaining investors. Company was the first to get exposed to liquidity crisis on debt side, caused by Covid-19 pandemic, as almost 65% of holding of the schemes to be closed was in the debt paper which are rated below AA.
Which Schemes to be closed:
Schemes to be closed with their AUM and holding of AA & A bonds are;
What Scheme closure means to investors:
Closure of the scheme means investors will no longer be able to do any transaction in the scheme. All the transactions like Buy / Sell / Switch / Systematic Withdrawal Plan (SWP) / Systematic Investment Plan (SIP) are now not allowed in any of the closed schemes.
What happens to existing investment:
Existing investment will remain in the scheme. Company will start liquidating the investment as and when the liquidity returns to the market or when it finds the buyer for debt papers it is holding. As some of the debt papers which schemes are holding will mature in coming time, the proceeds from these maturities or any proceed from sale of debt papers will be distributed equally amongst all the existing investors. As all of these schemes & debt paper in it have a different maturities spanning over up to almost next 3 years, complete redemption will take a long time and will certainly depend on overall economic scenario during this time period.
Will Regulator intervene:
Mutual fund Industry faced a similar situation during Global Financial Crisis in 2008 and also in 2013 when RBI intervened by opening a special window through which banks could access short term funds to provide liquidity to mutual funds.
But this time, it seems, the problem is more company specific rather than the industry specific. Franklin Templeton Mutual Fund is well known in the industry for taking aggressive calls on low rated debt papers for which it’s investors have been rewarded handsomely till now. Event like this, pandemic, should have been factored-in for holding low rated debt papers.
With pandemic worsening the situation across equity and debt market and event like Franklin Templeton closing the schemes, will only snowball the negative effect on the mutual fund industry. How the investors react to the ongoing situation will decide the future course for industry and the action regulator take to protect interest of the investors.