Due to COVID-19 lockdown, mutual funds are facing unprecedented liquidity challenges due to a variety of factors such as – rising redemption pressures due to heightened risk aversion, mark to market losses following a reduction in interest rates and lower trading volumes in the bond markets. These factors have together caused a significant and worsening liquidity crunch for open-end mutual fund schemes investing in corporate credits across the credit rating spectrum.
Franklin Templeton Mutual Fund has wound up six Fixed Income-oriented credit funds from April 23, 2020 considering “severe market illiquidity” caused by the COVID-19 pandemic. Franklin Templeton investment followed high-risk, high-return credit risk strategy to maximize the returns for debt investors.
Credit-risk funds investing in lower-rating securities are gaining popularity among investors because there is a potential for double-digit yields for investors. Credit-risk funds are a type of debt funds that invest approx. 65% of the investment corpus in less than AA-rated paper.
The wound-up scheme includes –
• Franklin India Low Duration Fund (FILDF),
• Franklin India Dynamic Accrual Fund,
• Franklin India Credit Risk Fund,
• Franklin India Short Term Income Plan,
• Franklin India Ultra Short Bond Fund, and
• Franklin India Income Opportunities Fund (FIIOF)
The reason why Franklin India chose to close the 6 Schemes –
• Low Credit quality (Asset hold by these schemes may turn to D rated or Junk)
• Low Liquidity (Indian Debt market is highly Illiquid due to Lockdown)
• High Redemption (Franklin India was facing a high volume of redemption in these 6 funds, which would reduce the value creation for Unit-holders)
• No fresh opportunity (Due to Banks-NBFC crisis & current lockdown, according to Franklin India there is no fresh investment opportunity in the Indian debt market)
• To protect the Capital of the current Unit holder (High redemption would have forced Franklin to sell the asset at low prices in the Market, resulting in capital loss to investors)
Let see the asset quality held by all the debt scheme closed by Franklin India. (Data as on 31st March)