Franklin Mutual Funds windup 6 Debt Funds
Corona virus is showing increased signs on stock markets even now. Stock markets have taken a beating in the last 2 months. Your mutual funds would have fallen by more than 30% during this time. Now mutual fund investors are seeing the other side of the picture. Franklin Mutual Funds have informed that it is winding-up / closing 6 debt mutual funds due to corona virus crisis. This is shocking news to mutual fund investors. In this article we would provide details about why Franklin India Mutual Funds is shutting down its debt mutual funds, what is the impact on mutual fund investors and whether Franklin Mutual Funds customers can do something about this.
List of Franklin India Debt Funds that are winding-up or getting close now
Here are the list of 6 debt funds that are closed now.
#1 – Franklin India Low Duration Fund
#2 – Franklin India Dynamic Accrual Fund
#3 – Franklin India Credit Risk Fund
#4 – Franklin India Short Term Income Plan
#5 – Franklin India Ultra Short Bond Fund
#6 – Franklin India Income Opportunities Fund
The total AUM is Rs 26,000 Crores from the above debt funds.
With this decision, AMC would not be processing any new purchases, stops SIPs and SWPs. You cannot even sell such mutual funds now and get back your money.
What is the reason for closure of debt funds by Franklin Mutual Funds?
Franklin Mutual Funds indicated that it is winding up these debt funds as it is difficult to maintain during this covid-19 situation.
Franklin MF says that they consulted their investment team and after careful evaluation, it has decided to close these debt funds.
Franklin Mutual Funds has 6 debt mutual funds where foreign institutional investors started pulling their money. Since it invests in short to long term securities, they cannot get their money from open market. Due to this redemption pressure, it has to borrow money by way of loans. However SEBI has put a threshold limit for such loans. They have crossed such limits now. In this scenario, honoring redemptions i.e. paying back to mutual fund holders is not possible.
Is this a right of shutting down the debt funds by an AMC?
From mutual funds investor point of view, this is a wrong decision. However, if you observe, AMC does not have an option. How mutual fund house would honor redemptions and make payouts to investors if it cannot sell its investments in the markets. With such move mutual fund investors would lose faith in investing in mutual funds.
What are the hidden factors in the entire windup decision?
Debt funds have turned risk in the last 1.5 to 2 years when corporates have started defaulting commercial papers invested by mutual fund schemes. However, let us see what’s really wrong with these 6 debt mutual fund schemes.
1) Every debt mutual fund scheme would invest in securities as per investment objective. However, the hidden factor is that all these debt funds invested in lower rated securities that has become illiquid now. When covid-19 crisis is seen globally, not sure why fund managers has not woken up.
2) These debt funds have invested in high credit risk securities which has become difficult to sell at this point of time.
Can Frankin India Mutual Funds close debt funds on their own decision?
There are SEBI guidelines if some AMC wants to close an open ended the mutual funds. They need to call mutual fund unit holders, discuss and finally proceed with the windup process. Such process is not required for FMP / close ended funds where there is maturity date.
Franklin India Mutual Funds windup 6 Debt Funds – What should I do now?
This is the trickiest question now. What should an investor do now?
1) If you have invested in any of these 6 debt mutual fund schemes and thinking what to do, there is almost nothing you can do now. Franklin Mutual Funds would still publish the daily NAV of these funds, but would not collect any management fees going forward. There would not be any fresh investments. As and when the situation improves, it would close its investments in a phased manner and would pay back to investors. It can take 1 month or 3 months or 6 months, which no one can predict. They would communicate to such debt fund investors through email. Just keep a close watch on your mails from them.
2) If you have invested in equity mutual funds from Franklin MF, it would not have any impact as they would continue in the normal way.
Should I review entire mutual fund portfolio now?
1) One should do a quick review about their entire mutual funds portfolios, i.e. equity funds and debt funds. There are various ways to protect Mutual Funds portfolio.
2) Try to avoid credit risk funds and the funds that are investing in low credit rating companies. If you check where the fund invested in value research or on AMC website you would know that.
3) Don’t invest in debt funds from single AMC. What happened today from Franklin India mutual funds can happen with other AMC. E.g. if you are investing in 3 debt funds diversify this across AMCs.
4) Review your mutual funds and continue them if you don’t need money in next 5-10 years. If you need money in next few months or 2/3 years, take out your money from mutual funds now
5) Don’t go overboard on any specific segment of funds. E.g. One investor commented last week that he is a high risk investor and investing only in small cap mutual funds. What happens if small cap mutual funds collapse? Once should invest in the mutual fund portfolio that has diversification i.e. large cap, midcap,smallcap, balanced funds. You can check this article on top 10 SIP mutual funds where I keep recommending funds across segments.
6) If you still think, should I exit mutual funds now in this stock market crash, you can check the article which I wrote earlire
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Franklin India Mutual Funds windup 6 Debt Funds – What should I do now
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