Franklin Templeton Crisis – India’s Top Mutual Fund House Story
Franklin Templeton is India’s ninth-largest mutual fund house. On April 24 2020, this fund house has announced that is it winding up 6 of its funds. This has shocked the investors of these funds as they may be incurring huge losses.The Story
Franklin Templeton is one of the most trusted and one of the top 10 mutual fund house in India. The MF house manages different funds which involve different risk to reward ratio. But on April 24 2020, the company announced that it is closing 6 of its funds due to adverse effects of covid19 on these funds. And these funds are damaging the entire portfolio of franklin Templeton.
Before proceeding further there are few things that need to be understood. While investing in mutual funds there is one important thing that needs to be understood. That is Risk to reward ration. Now when there is a high risk, the earnings from those funds will be high at the same time the losses will be very high. But when there is low risk, then your earnings are low but the fund is more stable and you incur no or fewer losses. This is the basic thing on which the companies diversify their different funds. Investors can choose the fund suitable to them based on the risk they want to take and the reward they wanted from it understanding the losses he might incur in that particular fund.
Now there is a specific category of a fund called Credit risk Funds. This particular type of fund is High risk and high Reward type fund. The fund manager of this particular company invests almost 60% of the money in company bonds that are AA rated. Now don’t get confuse what it AA rating. It simply means that the company is a very risky one. Hence the interest rate paid on these bonds is also high and hence fund managers invest money in these bonds and low rated papers. Hence you might incur huge profits of incurring huge loses if the company goes bankrupt.
In case of Franklin Templeton, all these 6 funds that are closed belong to this risky category. The six schemes are
- Franklin India low duration fund
- dynamic accrual fund
- credit risk fund
- short term income plan
- ultra-short bond fund
- income opportunities fund
These funds amount to almost 25% of the assent under management by Franklin. The reason given by the fund house is that it took the decision in order to protect value for investors via a managed sale of the portfolio, amid the severe market dislocation and illiquidity caused by the COVID-19 pandemic.
what does the closing of fund mean
When the fund house decides to close a mutual fund under its management, it means that it stops all operations with than fund and will start looking for buyers of assets under that fund. It will sell the assets and then the money collected will be given back to investors. Now since the operations are stopped and it has to wait for a prospective buyer the money of investors are blocked until the assets are sold. And at the same time, if the fund house rushes to sell the assets, it might sell at a discount which at the end affect the investors of these funds.
Overall the investors of these funds will have to bear the losses and will have to wait until the assets under this funds are sold and money is released by Franklin Templeton MF India. There is no specific timeline guarantee that is given by the company as of now and investors money is considered to be locked.
In most of the cases, buyers were not interested in such funds which are deteriorated and in addition to the present pandemic will only devaluate the fund even more. Hence the decision to liquidate the funds at this point of crisis is a big blow to the investors of those funds. But there is nothing that the investors can do, but only to wait for the amount they might receive from the sale of assets.
Now the investors of other funds which are also managed by Franklin Templeton are worried as these funds might also get affected by this decision. But Franklin has announced that there is no effect on the other funds that are managed by Franklin Templeton. The company has said that ongoing crisis has affected the low rated credit risk funds more and these 6 are the funds which have direct exposure and hence the decision has been taken to wind up these funds. But there is no effect of this decision on the other funds.
Effect on the sentiment of Investors
This is not the first time that fund houses have closed some of its funds bringing losses to the investors. In any crisis, the investors are given the last priority. This is a known truth in the capital markets. Hence at the end, investors are the one who is at the losing end.
In history, two non-banking finance companies have collapsed. They are Infrastructure leasing and financial services limited around September 2018 and Dewan housing finance limited around June 2019. Several Debt funds have to write off because of the collapse of these two companies. Then, in March this year, as many as 34 debt funds saw their net asset values go down as they had exposure to Yes Bank’s debt. Of this, funds managed by Franklin Templeton reportedly lost Rs 590 crore, the second-highest losses booked, after Nippon Mutual Fund’s loss of Rs 2,500 crore.
In India, mutual funds are considered to be the safest and best option for long term capital. many people invest their hard-earned money in mutual funds rather than keeping in Fixed deposits in banks. And many invest in Mutual funds as they feel that stock markets are very risk and mutual funds are safe and will give better returns.
Based on these situations that are happening in the Indian markets and also the present pandemic, the sentiment of the investor might get damaged. They might be worried to invest in these mutual funds. When people start to lose the interest to keep their money in mutual funds or in capital markets, then the investment that is available for companies will be reduced. And hence there will be a capital crisis in the economy. these affect the economy in the long run. Hence it is important that the investor’s sentiment needs to be safeguarded and secured.
RBI has announced that it has opened a special liquidity window for other mutual fund hoses to prevent the same thing happening in other companies as well. Even at this crisis of pandemic, RBI has taken a bold step to safeguard the investor’s interests and prevent any further crisis in the economy. RBI’s liquidity fund is aimed at reassuring investors and ensuring that funds have access to money to meet redemption pressure if people try to pull out their money. A similar effort back in 2009 is said to have calmed the industry, without actually needing to be used much. The fund offers cheap money to banks as long as they loan it out to mutual funds.
But did the investors take this? Already many investors have started to withdraw their money in panic when the news came out. So only the time will tell how the sentiment of Investor will be in mutual funds.
Until next time…..