Franklin Templeton on Thursday announced the winding down of six of its debt funds. This is an unprecedented move, in that the last time we saw a fund being wound up was with Sahara Mutual Fund in 2018, which was on the directive of the regulator. These are not small schemes, not that it is okay to do this if the size is small. The six schemes put together, as per the March factsheet, have assets under management of nearly Rs 30,000 crore.
It has been reported that the redemptions that Franklin Templeton received continuously in the last few weeks were much higher than average. It is possible that these would have left Franklin Templeton with no choice but to take this step. Let’s face it – if there is a continuous redemption pressure on a fund that houses low liquid AA or A-rated securities, it is just a matter of time before things go awry if the pressure of redemption is intense. That seems to have happened in Franklin Templeton’s case. Just that instead of taking any other course of action, Franklin decided to take the extreme step of shuttering its funds.
2015 was a turbulent year for Franklin Templeton debt schemes because of the perceived exposure to stressed sectors. This seems to have seen a replay in 2020, with redemptions of an even higher magnitude.
What Does This Mean?
Theoretically, the money that investors have parked in these schemes is locked. Yes, you read that correctly. If you had money in any of the six schemes, it is locked. It is an entire scheme, and not a small part of it, side-pocketed or segregated in a sense. When did you hear that last? There shall be no fresh investments or redemption in these schemes and investors will receive their money back as and when liquidity is available, either by selling securities to other prospective buyers or receiving maturity proceeds. Like I said, theoretically, the money is locked till the maturity date.
What is likelier is that in the following days some of these portfolios could be sold, as an aggregate, to willing buyers and some money would be returned to investors.
What Happens Next?
I fear that this will have some implications on the industry at large. Franklin has had a long track record, and thus the funds were of a large size. When such a thing happens, investors may quickly take the first step towards perceived safety – and that is redemption. Money in the bank. It is highly doubtful that every investor will see this as an isolated event occurring with Franklin alone and sit tight. If indeed the situation worsens, no one likes being considered an ostrich. The credit risk category saw the redemption of close to Rs 5,500 crore in March. So there is a steady stream of pullouts from the category anyways. With events like these, the fear factor will zoom ahead.
Would the regulator allow this?
An event like this, even in smaller-sized funds would create a flutter. This one has the potential of creating an avalanche.
The regulator and the industry, under fire since the Essel Group situation of 2018-2019, would be very keen to avoid such a scenario. One only hopes investors act with a rational mind, and don’t start redeeming monies from other sound funds. That will be counter-productive, for the investor and the industry.
Niraj Shah is Markets Editor at BloombergQuint.
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