Why Franklin Templeton winded up its six debt schemes?

1. A SHOCKWAVE IN MUTUAL FUND.
On 23 April, 2020, repercussions of COVID-19 were felt by
mutual fund holders. Franklin Templeton, one of the major
mutual funds winded up its six debt schemes holding a total
investment(assets under management) of around ₹26,000
crores. This winding up caused a tumult among respective
mutual fund holders. Franklin India Ultra Short Bond Fund,
Franklin India Short Term Income Fund, Franklin India Credit
Risk Fund, Franklin India Low Duration Fund, Franklin India
Dynamic Accrual Fund and Franklin India Income
Opportunities Fund were the six debt schemes that were
winded up. All these schemes were of short and ultra-short
durationand majority of the funds were invested in low rated
bonds (risky).
The winding up of these debt schemes means that there will
be no further investment or purchase under these schemes
and no redemption request will be entertained. Scheme
holders will get back their money only after the maturity of
these holdings or if the funds are sold-off given a fair price is
available. Till then scheme holders money is trapped in these
schemes.
WHAT ACTUALLY WENT WRONG-
The outbreak of coronavirus and prolonged lockdown in the
country has caused illiquidityin debt market causing high risk
and uncertainty. When the market is illiquid, there are less
buyers, especially for low rated bonds. Due to which the price
of low rated bonds eroded.

2. The major reason that made the company to take such a
severe decision was large redemption pressures from the
holders/investors due to negative market sentiment.
Investors’ confidence got dwindled due to outbreak of the
pandemic as a result they started to redeem their debt
schemes.
IS COVID-19 TO BE PUT TO BLAME?
The COVID-19 onlycompoundedtheproblemorjust actedlike
a fuel in fire. But the fire was triggered in 2018, the IL&FS
CRISES. Franklin Templeton itself is also responsible to some
extent.
According to SEBI, the regulatory body for mutual funds, the
ultra-short duration funds can have bonds with a tenure
between three months and six months. But franklin just
walked in opposite direction and invested in long-duration
bonds, the longest duration being 9 years. Long-dated
securities normallyhave lesser liquidityascompared to short-
dated securities. Further to exacerbate the problem the funds
were not only invested in long-durationbonds but also in low
rated and risky bonds (credit risk funds).
Generally mutual funds invest in credit risk fund so as to earn
high return and can alluremore investors toward its schemes.
So mismanagement was done on the part of the company. If
the company had acted vigilantly while investing the funds,
the magnitude of the problem would have been lower.
After the infamous IL&FS crises in 2018, the company faced
continuous redemption problem. The company had invested

3. a lot of funds in bonds of IL&FS and after its downturn, the
recovery seemed difficult. The crises of IL&FS also had a
negative impact on the corpus (total funds invested in all six
debt schemes) of debt schemes offered by Franklin
Templeton.
The below timeline show us the impact of IL&FS crises on the
corpus of already mentioned six debt schemes.
₹47,658 crore. Lost ₹16,804 crore. ₹30,854 crore.
⟶
Corpus as in August, 2018. Over a period of 19 months. Corpus as on March, 2020.
Further the company also borrowed a loan of ₹2,753 crore to
manage the redemption pressure caused due to IL&FS crises.
The company raised thisloan by keeping the high rated bonds
in these debt schemes as collateral with the banks. Now only
medium or low rated bondswere left in the portfolio of these
debt schemes.
WAS THEREANY OTHER OPTION AVAILABLE WITH FRANKLIN
TEMPLETON?
Generally,
The mutual fund company can use funds available with them
(cash in hand/bank),without actuallyselling the securities, to
make the redemption.Butthismethodisonlyapplicablewhen
amount of redemptions are low.
The company can also borrow from bank by keeping the
required securities/bonds as collateral with the bank, to

4. entertain the redemption. Mostly while lending loans to
mutual funds, banks only accept high rated securities as
collateral. So it is imperative for a mutual fund to have high
rated securities in its schemes/portfolios so as to availloan on
them.
And if the mutualfund is ableto sell the bondsat a fairmarket
price, then the proceeds from the sale of the bonds will be
used for redemption procedure.
But for Franklin Templeton it was a hand-to-mouth situation.
All the alternatives for redeeming were shut down by the
COVID-19. Eroded market value of bonds, followed by
humungous redemption pressure and low quality of bonds
just made it difficult for the company to elude the problem.
Further the company could not even borrow from the banks
because all the high quality bonds (under the mentioned
schemes) were alreadykept as collateralwith the bank during
IL&FS crises.
So keeping in mind the current situation and continuously
eroding prices, it was best for the company and scheme
holders to get the schemes winded up. The winding up was
done keeping in mind the interest of the scheme holders
because selling bonds at current market price would have
caused a great loss. Right now RETURN OF CAPITAL IS MORE
IMPORTANT THAN RETURN ON CAPITAL.
And just to give the severity of bond market, the corpus of 6
debt schemes lost ₹4,075 crore in first 20 days of April and
reduced corpus stood at ₹26,779 crore from ₹30,854 crore.

5. RBI RESPONSE TO IT-
Decisions taken by Franklin Templeton was staggering for the
whole mutualfund industry andinvestors (in mutualfunds). It
pushed the industry and its investors into conundrums.
Various other mutual funds feared that they might face the
repercussions of the decision taken by Franklin Templeton.
Even the investors lost their confidence in the industry. So to
keep the situation and confidence of the investors intact, RBI
on 27 April opened a ₹50,000 crore special liquidityfacilityfor
mutual funds (SLF-MF). Under the SLF-MF, RBI will conduct
repo operationsof 90-day tenor at the fixed repo rate. Banks
have to placebid with RBI for the funds to be availedby them.
All the funds availed by bank under SLF-MF will be
used exclusively for meeting the liquidity requirements of
mutual funds.
Banks will then lend these funds to mutual funds against the
collateral of good quality bonds.
In nutshell we can say that the success of SLF-MF depends
solely upon the banks. As in this facility banks are acting as a
middle-men between RBI and Mutual Funds.
And the rest is left on to the CRISES and TIME.....