Franklin Templeton is winding up 6 yield oriented debt funds because of the liquidity situation that came about due to COVID-19. If you are invested in the following funds, you might have received an email from Franklin.

  1. Franklin India Ultra Short Bond Fund (FIUBF)
  2. Franklin India Short Term Income Fund (FISTIP)
  3. Franklin India Credit Risk Fund (FICRF)
  4. Franklin India Low Duration Fund (FILDF)
  5. Franklin India Dynamic Accrual Fund (FIDA)
  6. Franklin India Income Opportunities Fund (FIIOF)

Why is this happening?

Due the lockdown situation in India due to COVID-19, the fund has been facing a liquidity challenge due to redemptions. Unfortunately, when investors redeem the fund has to sell some papers to give cash to the investors. The problem is that since the papers are high risk papers there are not many takers and if the demand is low then obviously the value at which the papers can be sold will be low and as a result the NAV will fall dramatically. While Franklin can and did borrow to meet the redemptions, it seems like the pressure is too great to handle.

What is happening?

The fund house has decided to stop all SIP, STP, investments and redemptions. So you can neither invest nor redeem anything. All your SIPs and STPs will be null and void.

Is this good or bad?

Well, there is nothing good or bad about it. There is nothing the fund could do. If it cannot sell the papers, it cannot honor redemptions. So they had to close all redemptions. If they were forced to sell, the NAV will fall drastically.

Will I lose money?

You will not lose all the money because the fund will convert papers to cash when the bond comes due because the bond issuers have to honor it. It is possible that they may default as well. Or may be the fund will sell at a lower price. So all your money may not come back.

When will I get my money back?

This is a bit unclear to me. I am assuming that Franklin will pay back the investors as and when the bond matures. So it can take some time depending on the average maturity of the bonds. You can check the average maturity from value research. For example the average maturity for Franklin ultra short term fund is 0.61 years which is about 7 months. But remember that you will not get all the money by average maturity date. Since it is an average, there could be some bonds which mature much later, so either the AMC will sell it at a lower price at an earlier date or wait for maturity. We don't know the details. For example Franklin ultra short term bond hold a bond which matures in 2029!

What are the implications?

One of the biggest problem with winding up the funds and returning the investments is that there will be a tax implication. Returning the money is akin to redemptions but not by your choice. So you have to pay taxes on the capital gains as a result of returning the money.

If you are dependent on regular income from these funds like me, then it is unfortunate. Hopefully you have enough in your emergency fund and hope that is still liquid. Seems like this is one more reason to have multiple debt funds from different fund houses. But from what I understand, the fund will return money to investors as and when the bond matures or repayments are made on the bonds (after accounting for any liabilities). So hopefully there will be some monthly or quarterly income.