You have all read about the Franklin debacle regarding the closure of 6 Franklin India Debt Funds. Many have invested in those funds. Especially the Franklin India Ultra Short Term fund, lured by the excellent returns. I am also one of the investors in the ultra short term fund. And I have a significant portion of my debt portfolio in it. The fund came with a promise of "optimum balance between regular income and high liquidity". But now, it can neither generate regular income, nor does it have any liquidity at all. Talk about the irony :)
Most, if not every one, invested in the fund understanding the credit risk. The fund has always carried more low quality papers than AAA rated ones. However, no one ever anticipated the huge redemption burden due to COVID-19. Anyway, past is in the past. Now the question on everyone's mind is "how much will I get back from the fund?".
Some back of the envelope calculations
To break down the mystery, I have done some basic calculations. Lets find out. Franklin recently releases the April 30 holdings. I am using that information and the information from April 23 holding. First, lets look at the April 23 holdings which are set to expire by the end of April.
If everything worked as expected and there were no defaults, the fund should have received Rs. 13,924.07 lakhs by the end of April. For the direct plan, the expense ratio was 0.37% for most of April and then it changed to 0.07% after April 23. That comes to around 0.3% on average. Since the expense ratio is per year, in the month of April, the expense would have been 0.025%. The fund's market value on April 23 was Rs. 1,031,641.92 lakhs. So the expenses should have been Rs. 257.91 lakhs. After paying for expenses, we are left with Rs. 13666.16 lakhs (Rs. 13,924.07 - Rs. 257.91).
The fund has borrowed Rs. 63,715.78 lakhs, presumably to fund redemptions. So with the left over money from April, the fund must have paid back part of the borrowing. I don't know what the borrowing's interest rate was, but lets say it was 0%. That should leave us with Rs. 50,0049.62 lakhs worth of borrowing at the end of April. But from the April 30, 2020 holdings, it looks like the number is Rs. 51,198.95 lakhs. Not really sure why it is higher by Rs. 1,200 lakhs (about 1.88% of borrowing) when compared to my calculations. Perhaps they have other expenses in addition to borrowing expenses? Or may be the the papers did not return in full?
What about payments in May?
Thanks to the expenses and borrowings, the fund did not make any residual income in April to give back to investors. How about May? Lets take a look. From the April 30 holdings, we see that there is a possibility of Rs. 72,965.26 lakhs coming back!
That is huge, assuming Piramal and Hero will honor their contracts. Now lets do the same back of the envelope calculations as before.
Income = Rs. 72,965.26 lakhs
Expenses @ 0.07% annually on Rs. 1,010,254.49 = Rs. -707.17 lakhs
Repayment of borrowing = Rs. -51,198.95 lakhs
Unaccounted 1.8% expenses = Rs. -964.26 lakhs
Left over income after expenses = Rs. 20,094.88 lakhs
That is good news. There is a chance that Franklin will return the money to investors in May. Not sure if the plan is to repay immediately, or end of the month or every quarter. The left over money is about 2.09% of the Net Assets. Therefore, if all goes well you might get back 2.09% of your investment in the fund in May. Not much, but at least that is something.
Why is this important for me?
In my case, this information is quite important. Since I have a lot of my fixed income invested in this fund, I am more worried about the tax implication of it. Normally, I redeem a month's worth of expenses from the fund and use it for my monthly expenses. However, with the wind up situation, I could not redeem this month. I am using my emergency fund. While I can redeem from my other debt funds to meet my expenses, I don't want to. The reason is that if Franklin Ultra Short Term returns a lot of my money, I will have to start paying advance taxes. In addition, I will have to pay taxes for the money redeemed from other debt funds too if I choose do redeem them.
The point is, if Franklin returns the 2% this month, I wouldn't have to dip into my emergency fund for the next month's expenses. I have 4 months worth of expenses saved in emergency fund, so not an issue. And this is sort of an emergency ;)
Franklin Ultra Short Term fund has papers that mature every month until the end of this financial year, so if it returns money in May, I can assume it will do so every month. I did not compute payouts for the rest of the months because I want to see what Franklin will do in May. I don't believe in counting the eggs before they hatch :)
If you are interested, you can do the same kind of analysis for other funds in case you invested in them. But Franklin has been sending mails with all the information already calculated, so you don't really have to do anything. This was just a fun exercise for me. By the way, do you know why I have the 1.8% discrepancy above? Do let me know in the comments below.