In Debt Funds, Be Alert About The Warning Signs!
Dalal Street Investment Journal|July 20, 2020
In Debt Funds, Be Alert About The Warning Signs!
With the fall in overall interest rate, we have seen a decline in rate of interest offered to various small saving schemes by the government. This will impact investors who depend on such schemes as part of their retirement plan or to meet certain financial goals
It is indeed very unnerving to see that debt mutual funds, which are considered to be safe haven when compared with equity, have been surrounded by back-to-back negative events, thereby denting confidence in this asset class. It all started with the IL&FS fiasco which was followed by Essel Group and DHFL defaulting on payments and getting downgrades from the credit rating agencies. Then there was an issue with Vodafone Idea. All these adversely impacted the various fund houses and their debt funds. And now we have Franklin Templeton winding up its six debt mutual schemes.

It is rightly said that hard times teach valuable lessons! The Franklin Templeton saga has been a punishing lesson to investors. A couple of months ago, Franklin Templeton wound up six of its debt schemes alluding to severe redemption pressure and illiquidity in the bond markets amidst the ongoing corona virus crisis. While doing so, the fund house mentioned that this is the best possible way to safeguard the interest of existing investors. In fact, it recently recovered ₹2,666 crore in its six wound up schemes.

Therefore, as and when the debt instruments held by those funds reach maturity, Franklin Templeton would be able to recover the dues. However, it is a long journey ahead. The table below highlights the maturity profile of the six closed funds from Franklin Templeton. It can be seen that all the dues are expected to clear not before 2025. Therefore, to avoid such a situation it is always better to review your portfolio quarterly.

Listed below are a few pointers that will help you to be forewarned about any trouble that may be brewing in the debt funds you own.

The YTM Factor


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July 20, 2020