Franklin Templeton India’s decision to shut down six of its debt schemes has caused an unprecedented panic among investors. Mumbai-based financial planners Suresh Sadagopan and Steven Fernandes both saw at least one of their clients redeeming all investments in debt mutual funds and moving the money to fixed deposits.
“The client said he wants to preserve the capital," said Fernandes, a Sebi-registered investment adviser and founder of Proficient Financial Planners.
Since the Franklin event, investors have been calling their advisers to consult them. “Different investors have different concerns. Some asked if they should move out of debt mutual funds, while some asked if they should redeem investments from Franklin Templeton’s equity funds. But the most common question was whether their debt portfolios needed a change," said Sadagopan, founder of Ladder7 Financial Advisories, a Sebi-registered adviser.
CHANGES ADVISERS ARE MAKING
With debt funds facing rating downgrades and defaults, most financial planners have been actively tracking investments of their clients. Financial planners have been systematically moving their clients’ money out of credit risk funds over the past few months. Some of them did have client’s money in the debt funds of Franklin Templeton that the fund house has winded up. But the investments were not significant for planners that Mint interviewed. The event, however, has made planners review existing investments more carefully.
Sadagopan, for example, is looking at the percentage of papers that are rated AA or below in schemes where his clients are invested. “Earlier, we would be fine if, say, 20-25% of the portfolio had papers that are rated AA or below. Now we are only sticking with funds where such papers comprise 15% or below," he said.
Arnav Pandya, founder, Moneyeduschool, a financial literacy initiative, also follows similar evaluation criteria. “Almost all funds have papers rated AA or below. But I prefer schemes that have only up to 10-15% lower-rated papers. In some cases, even 20% of the portfolio is lower-rated paper is fine provided there is enough diversification within those papers," he said.
Planners are exiting schemes that have papers rated AA or below to ensure that the redemptions in the fund do not hamper the returns. “AAA-rated papers are more liquid, and fund houses can meet redemption pressure if there is a panic withdrawal. Lower-rated papers would be difficult to liquidate in the current environment," said Fernandes.
WHERE IS MONEY BEING MOVED?
The money withdrawn is finding its way into fund categories that have lower credit risk. Depending on clients' requirement, the funds are redeployed. For those who need money within one-two years, the investment is in liquid funds. For those who need it after two years, financial planners are choosing corporate bond funds or gilt funds. All this is done after taking taxation into consideration.
Most planners still believe that debt funds are one of the preferred investment products, as they diversify the risk by investing in papers of different companies and they advise that investors should not withdraw investment in a panic state.