Front-End Leaks

The collapse of six Franklin Templeton mutual funds underlines the volatility of credit risk funds in times of economic shock. It behoves investors to be more cautious and more patient.

- Yagnesh Kansara

“Abull market is when you get a stock tip from your barber…a bear market is when you get a haircut from your fund manager.” Thus tweeted corporate leader Lloyd Mathias in a particularly jocular vein on April 20. Little did he foresee the prescience of his witticism. Three days later, the lockdown necessitated by the COVID-19 pandemic marked its first casualties in the Indian financial market. The closure of six debt schemes by the Franklin Templeton (FT) Mutual Fund has resulted in eroding the confidence of investors to a large extent and has created a sort of crisis of confidence in the market. These six debt schemes together have Assets Under Management (AUM) worth over Rs 28,000 crore.

Through a notice dated April 23, 2020, FT MF announced its decision to wind up six of its 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, and Franklin India Income Opportunities Fund.

As per the fund house, “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 (sic). At the same time, mutual funds, especially in the fixed income segment, are facing continuous and heightened redemptions.”

These funds have been facing significant redemption pressure, which intensified in the months of March and April, witnessing an estimated net outflow of Rs 9,148 crore in March alone. Franklin Templeton says that in this scenario, this is the best possible way to safeguard the interest of investors and is the only viable means to secure an orderly realisation of portfolio assets.