Simple Explanation of the Franklin Templeton Debt Fund Situation
A plain-language breakdown of Franklin Templeton's decision to wind up six debt schemes in April 2020, and what it meant for investors.
Tejas Shah
Proprietor of Silicon One and Silicon Systems, AMFI-registered Mutual Fund Distributor since 2004, based in Vadodara.
The news of the day was Franklin Templeton's late-evening announcement to wind up six of its debt schemes — Franklin India Low Duration Fund, Ultra Short Bond Fund, Short Term Income Plan, Credit Risk Fund, Dynamic Accrual Fund and Income Opportunities Fund. According to the fund house, there had been a dramatic, sustained fall in liquidity in certain segments of the corporate bond market, and these funds faced significant redemption pressure — in March alone, they saw combined redemptions of Rs. 9,148 crore.
A bank-run analogy
Imagine every depositor of even the strongest Indian banks — HDFC, ICICI, Kotak — queuing up tomorrow morning demanding their money back at once. They wouldn't get it, because the majority of that money has been lent out. Franklin Templeton was facing a broadly similar scenario: too many investors wanting to exit these specific funds at the same time, in a debt market that isn't very liquid to begin with.
Why fund managers usually manage this comfortably
Under normal conditions, fund managers handle liquidity through laddered maturities across the portfolio, short-term paper (2-3 year duration for most funds in this space), bank borrowing lines, a diversified investor base so no single investor can move the portfolio, and exit loads that discourage sudden mass exits. These are unprecedented times, and fear compounded the redemption pressure beyond what these usual safeguards could absorb.
What happens next
The fund house will liquidate the underlying investments and return the proceeds to investors as the bonds in the portfolio come due for interest and principal payments — rather than allow further redemptions or purchases in the meantime, to protect the remaining unit holders.
Live happy and rich — keep investing. — Tejas Shah, Founder, Silicon One. (Published in consultation with Amar Pandit, CFA, CFP.)
#markets#mutual funds
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