FT has added a new dimension of risk to Indian debt funds
On April 23rd, Franklin Templeton India announced the winding up of six of its debt funds. The common thread among all these funds was that they were all debt funds. These six funds would entail the winding up of 14 segregated fund portfolios. The total AUM of these 6 funds is a little over Rs.28,000 crore and accounts for 25% of the total AUM of the Franklin Templeton AMC in India.
What this winding up entails?
The winding up of the 6 funds by the FT group is like any other liquidation of assets. All the debt instruments owned by these six funds would be gradually and systematically sold by the trustees who are appointed as administrators of these funds. Once a winding up notice is given by the fund, then effective from 24th of April all fresh purchases and redemptions in these six funds have automatically come to a halt. Also, the payout to the unit holders will not be immediate but will happen over a period of time on a proportionate basis. That means if the fund is able to realize a value of just 40% of the value of the bonds from the issuers, then that is what the debt fund investors will get. The urgency with which the funds were wound down points to a larger capital risk! This also means that any SIPs on these funds would automatically be cancelled and the same would apply to any SWPs on these funds. The fund house is yet to clarify on time lines but that will await unit holder approval.
Blame it on COVID-19
Franklin Templeton Fund has put the blame for the sudden decision on the liquidity disruption in bonds caused by COVID-19. The fund was, apparently, not in a position to handle redemption requests without resorting to an attic sale of bonds and that would have only worsened the situation. However, that argument looks a little hard to digest. Most of the credit risk funds in India are heavily invested in AA rates bonds and lower. They offered higher yields but also came with a huge insolvency risk. The decision to invest in these assets was consciously taken. Also, investors in credit risk funds are typically HNIs and family offices and they should have done their due diligence better. COVID- 19 was just the trigger for the action.
What can investors do?
Frankly, investors do not have much of a choice but to wait. If you exited ahead of 24th April, then the redemptions would be honored. But, others will have to wait till the assets are liquidated. Of course, ANMI and AMFI are taking up this issue with SEBI but clearly the fund is well within its rights to summarily wind up a fund if it is unviable. The key takeaway for SEBI may be to regulate credit risk funds more closely to avoid any mis-selling. For the retail investors, the message once again appears to be one of understanding risk. After all, there is nothing like a free lunch!