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Business News/ Money / Personal Finance/  10 FAQs about the freeze in Franklin Templeton debt schemes
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10 FAQs about the freeze in Franklin Templeton debt schemes

Franklin Templeton AMC has said that it will publish a NAV for the schemes on a daily basis and eventually communicate more details on an exit strategy
  • A rough measure of time can be taken by looking at the average maturity of the paper held in these schemes
  • Photo: iStockPremium
    Photo: iStock

    What happened in Franklin Templeton debt schemes?

    Six schemes of Franklin Templeton Mutual Fund had taken aggressive credit calls in their portfolios. As India went into lockdown post the covid-19 crisis, these papers became largely illiquid in the debt market. At the same time investors grew jittery about credit risk and redemptions in the funds soared. This forced the fund house to borrow money from banks to honour them. However this position was unsustainable and hence the fund house took the decision to close the schemes to both inflows and outflows.

    If you have money in any of these schemes you will not be able to withdraw it. The schemes are Franklin Ultra Short Bond Fund, Franklin India Low Duration Fund, Franklin India Short Term Income PLan, Franklin India Dynamic Accrual Fund, Franklin Income Opportunities Fund and Franklin India Credit Risk Fund.

    I thought credit risk was only in credit risk funds. Why have other categories been affected?

    This is not true. Credit risk affects all types of mutual funds. That said, some mutual funds take a particularly aggressive credit approach to earn more returns. They do this even in buckets like ultra short duration or low duration which are perceived to be low risk.

    I am invested in other debt funds, should I exit?

    Take a careful look at the portfolio of the fund in question. Remember that even if the portfolio looks slightly risky, a stampede of investors out of the fund can amplify what may have been a modest issue. Hence it is best to err on the side of caution in case of funds where the portfolio looks shaky. If you cannot figure this out yourself, speak to a SEBI Registered Investment Advisor (RIA).

    However, note that there may be other costs to exit such as exit load and tax. Exit load is levied for exits within a few months of entry to a few years depending on the type of fund. If you are trying to figure out which debt schemes to pick, look at the Mint 50 (https://bit.ly/3avGN1n) as a starting point.

    Consider tax as well if you are exiting a fund. Short Term Capital Gains Tax (STCG) is at slab rate for holding period of less than 3 years. For longer holding periods, Long Term Capital Gains Tax (LTCG) is levied at 20%. You are also given the benefit of indexation.

    When will I get my money?

    Franklin Templeton AMC has said that it will publish a Net Asset Value (NAV) for the schemes on a daily basis and eventually communicate more details on an exit strategy. A rough measure of time can be taken by looking at the average maturity of the paper held in these schemes. The average maturity of Franklin Ultra Short Bond Fund is 0.62 years or about 7.5 months. For Franklin Low Duration, Franklin Short Term Income, Franklin Dynamic Accrual, Franklin Income Opportunities and Franklin Credit Risk that average maturities are 1.46, 2.75, 4.28, 2.55 and 3.08 years (as of 31st March 2020).

    However the actual money you get back can be hit by defaults in the portfolio or by the fund house selling its holdings at lower prices.

    What if I have units in segregated portfolios of Franklin Templeton Mutual Fund?

    If you have units in one of the segregated portfolios (side pocketed Franklin Templeton schemes) in lieu of previous defaults in Vodafone Idea or Yes Bank, these are entirely separate from the main portfolios. You will get payments in these if and when the borrowers in question pay back or there is recovery against them.

    What if I need the money for financial goals, emergencies, daily living expenses or Systematic Transfer Plans (STPs) into equity funds?

    Unfortunately you cannot do anything about the situation. If you have a mutual fund distributor or an SEBI Registered RIA who has failed to warn you or act in time, ask for an explanation from this person. Create an emergency fund from other resources at your disposal or from your monthly income - this is a crucial part of financial security. Look at meeting financial goals from your other investments. Also, if you have the money, set up your STPs from another liquid fund until you get back your money in these schemes.

    Will I have to pay exit load and tax when I eventually get back money from these schemes?

    Franklin Templeton has clarified that you will not have to pay any exit load. However you will be liable to pay tax on any gains you have made in the schemes when the money is returned.

    Will the AMC charge expense ratio on the affected debt schemes?

    Franklin empleton AMC has clarified that it will not charge an expense ratio on the schemes in question except for ancillary operational expenses such as audit fees.

    Do I get a say in this action by the fund house?

    Under SEBI Mutual Fund Regulations, 1996 a meeting of unit holders needs to be called to approve the winding up procedure and the procedure needs to be passed by a simple majority. Under the current lockdown the meeting may be held through web conferencing or it may be postponed to after the lockdown. You can voice your opinion in the meeting when it happens. Franklin has not released any notification about this.

    Should I move out of mutual funds and into bank fixed deposits?

    Although the Franklin incident is an eye opener, and calls for a review of your debt portfolio, moving completely from debt funds to fixed deposits may be an extreme step. Debt funds on average offer somewhat higher returns than fixed deposits and for holding periods over 3 years, a favourable rate of tax (20% and indexation benefit). That said, you must be prepared for some level of risk when you invest in mutual funds.

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    ABOUT THE AUTHOR
    Neil Borate
    I head the personal finance team at Mint. I have been writing about personal finance for the past 8 years after finishing two degrees in law and economics respectively. I do what I do, to help the ordinary Indian saver and investor.
    Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
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    Published: 24 Apr 2020, 10:02 AM IST
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