Home / Money / Personal Finance /  Franklin Templeton marks down its Fund-of-Fund exposure by 50%

Franklin Templeton Mutual Fund has marked down its Fund-of-Fund (FoF) exposure to the debt funds being wound up by 50%. A Franklin Templeton AMC spokesman said that investments by the FoF Schemes in the 6 affected underlying schemes were illiquid effective April 24, 2020. "Hence, considering the immediate illiquidity of the investment, these funds were fair valued," he added. The spokesman further stated that the AMC was re-working the underlying asset allocation of the fund of fund schemes and "will intimate the changes to investors shortly." A Fund of Funds (FoF) is a mutual fund which invests in other mutual funds.

Franklin Templeton Mutual Fund has six such FoFs which saw sharp declines on account of their holding of the 6 Franklin debt schemes which are being wound up. Among the FoFs, Franklin India Multi Asset Solution Fund fell by 22.41%, Franklin India Dynamic Asset Allocation Fund fell by 16.6% on 24 March according to data from Value Research. The two schemes had allocations of 50% and 46% respectively to Franklin Short Term Income Plan, one of the 6 debt schemes as of 31st March. The lower drop in the Dynamic Allocation Fund suggests that it may have pared some exposure to Franklin Short Term Income Plan.

Franklin Templeton AMC also has four other FoFs which allocate assets between equity and debt as per a customer’s age. They are Franklin India Life Stage Fund of Funds 20s, 30s, 40s and 50s. They each had exposure to Franklin India Dynamic Accrual Fund, one of the 6 schemes being wound down. The exposure at the end of March was 12.56%, 29%, 38.14%, 52.23%, respectively. The 4 life stage schemes were down 6.59%,13.51%, 17.81% and 29.71%, respectively. Since asset allocation funds have both equity and debt, some of their Net Asset Value (NAV) changes occur due to equity movements also. However the vast majority of the NAV changes mentioned above were due to markdowns.

In life stage funds, more money was placed in the higher age brackets because ordinarily debt is perceived to be less risky than equity. “Investors should exit these FoFs. This is a market panic situation and redemptions in these FoFs from other investors might further amplify your risk. Also you do not know how much of the portfolio will default. Hence my recommendation is to exit," said Viral Bhatt a Mumbai based mutual fund distributor.

A recovery in the holdings of the 6 Franklin debt schemes will help investors in the FoFs to also recoup their losses. Hence the trade off for investors in these schemes is whether they should take the current loss and exit or stay put in the hope of recovery but also with the risk of further write-downs.

Investors should take a decision on these FoFs after considering their risk appetite and financial goals. Staying in them may expose them to further losses while an exit will crystallize the NAV drops.

ABOUT THE AUTHOR

Neil Borate

Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.
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