A personal finance expert answers the most troubling questions about Franklin Templeton mutual funds

• Franklin Templeton, one of the largest and oldest asset management companies (AMC) in India, has shut down six debt funds because of a severe liquidity crunch caused by the Coronavirus crisis.
• Investors of these six funds will have to wait for Franklin Templeton to realize money from the assets, before they can get their money back.
• At the moment, Franklin Templeton has not given any timeline in this regard. It is likely that more information will only come when market conditions improve.

Franklin Templeton India, one of the largest and oldest asset management companies (AMC), decided to close down six debt funds, blaming the liquidity crunch caused by the Coronavirus crisis. In total, these six debt funds are estimated to have locked in ₹30,800 crore of investor wealth.

“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,” Franklin Templeton India said in a statement on April 23.

“At the same time, mutual funds, especially in the fixed income segment, are facing continuous and heightened redemptions,” the AMC further added. As Franklin did not have enough cash to meet the redemptions, it had to shut down these debt funds.

Sensex tumbled by more than 500 points today (April 24), however personal finance expert Gaurav Mashruwala suggests that the “markets did not react” to the Franklin Templeton news.

“Look at the past couple of days – 500-1,000 points up and down has been happening. Are we expecting markets to maintain status quo for days and weeks and months? It’s not possible,” Gaurav Mashruwala, a certified financial planner told Business Insider.

According to him, people should not panic. “If you look at the overall equity market, which (has fallen) from 42,000 to 31,000. At 25% (crash) we are not as anxious. But a fund house with 1.4% funds says there is high risk, there is a concern,” he added.

‘This is not the end of the world’

Mashruwala says that advisors should have conveyed the right message to investors all along -- that mutual funds come with a certain risk.

“An almost similar incident happened in 2013, but the only difference is that then the economy was running . Right now, we are in a situation where the economy is not moving. People like you and me should accept the reality, we shouldn’t be complacent. Put the facts out, but the approach I’m taking is this is not the end of the world”, he said while urging people to be responsible.

‘Avoid knee-jerk reactions, don’t redeem funds’

Urging people to avoid knee-jerk reactions, Mashruwala said people should not redeem additional funds.

“Avoid knee-jerk reactions, don’t redeem funds. Consult your advisor next week and then take your next steps. We have to take a balanced approach,” he said.

But what does debt fund closure mean for you as an investor? Will you get your money back? How long will you have to wait? We try to answer all your questions.

Which debt funds have been shut down by Franklin Templeton?

These are the six funds which have been shut down:

• Franklin India Low Duration Fund
• Franklin India Dynamic Accrual Fund
• Franklin India Credit Risk Fund
• Franklin India Short Term Income Plan
• Franklin India Ultra Short Bond Fund
• Franklin India Income Opportunities Fund

The total assets under management (AUM) in these funds are around ₹30,800 crore.

Why did Franklin shut down these funds?

The Covid-19 pandemic has brought businesses to a standstill. With the economy virtually shut down and several companies staring at liquidation, investors fear that they will lose their money.

In such a scenario, many investors have decided to redeem their investments. Since the economy is shut down, there is a severe liquidity crunch in the market, deepening the crisis.

Franklin Templeton relied on a ₹5,000 crore credit line from banks, but this might not have been enough to meet the redemption pressure. Due to this, Franklin had to shut down these six funds. Its remaining funds are unaffected by this decision.

Does this mean I will not be able to sell my investment in these funds?

Yes. Franklin has shut down these schemes. As such, no transactions will happen now. If you have invested money in these funds, you will not be able to redeem it for the time being.

What happens to the money I invested in these schemes?

Your money is under a lockdown, so to say. Franklin will try to sell the assets (bonds of companies) it has purchased.

As and when Franklin realizes money from these assets, it will repay you and other unit holders in the proportion of your investment.

Will I lose any money I invested in these schemes?

The amount of money you receive will depend on how much Franklin realizes from the asset sale. You could end up losing a part of your returns, or in the worst-case scenario, you could end up losing some of the principal too.

Franklin will first repay the lenders and then investors, which could result in a longer wait for you. This also increases the chances of a loss, but this is not certain yet.

How long will I have to wait to get my money back?

It is difficult to say anything at the moment. A lot depends on the market conditions and whether Franklin is able to sell the assets.

Should I redeem other mutual funds and move the money into a bank fixed deposit?

This depends on three factors:

Risk factor: There is always a risk factor associated with mutual fund schemes. Generally, higher the risk, higher is the return.

Your risk capacity: This is about the amount of risk that you are ready to take. If your risk capacity is low, you will want to stick with low-risk and overnight funds – these funds have a maturity of one day and thus, they are highly liquid.

Your monetary requirements: Whether you need the cash right now or in the immediate future.

Mashruwala urged investors to consult their advisors before making a decision.

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