On 23 April 2020, at the end of the evening, a press release was made from Franklin Templeton Mutual Fund, one of the major asset managers of India (AMC).
It was stated in the announcement that Franklin Templeton would wind off 6 of its debt funds. Since then, hectic discussions have taken place about what it means and how it impacts and rightly so investors. declaredIt is the first time in the history of mutual funds in India that a winding up has been declared.
Let’s know what’s happening around mutual fund industry, why it happened, how it impacts you and what you can do next. in this blog.
First of all – What are the funds closed?
The following six funds from the Franklin Templeton Mutual Fund would come to an end according to the interaction.
- Franklin India Ultra Short Bond Fund (FIUBF)
- Franklin India Short Term Income Fund (FISTIP)
- Franklin India Credit Risk Fund (FICRF)
- Franklin India Low Duration Fund (FILDF)
- Franklin India Dynamic Accrual Fund (FIDA)
- Franklin India Income Opportunities Fund (FIIOF)
Why do they wind up? Why do they step so?
You ought to look back and consider how the AMC handles these funds as that is essential to this decision in order to appreciate the purpose behind this.
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AMC ‘s policy for such funds is to take credit risk to maximize returns.
Looking at the above mentioned collection of funds, there are all sorts of debt funds, like low duration and also ultra low duration. Today, while all of the AMCs are taking risks with credit risk funds to achieve high revenue, even in short duration funds (low and ultralow) that are meant to be low risk, it’s only Franklin who decided to follow this approach.
Franklin Templeton adopted the financing risk strategy by engaging in low-rated bonds through debt funds to achieve strong returns.
Low-rated bonds offer a higher interest-rate because the issuer is not repaying interest payments or principal amount owing to a higher risk of default. In order to account for this possibility of investing in these bonds, the fund manager prefers to offer a higher interest rate. Credit risk is defined as this default risk.
But these funds have been running for quite a while and produced outstanding returns, what went wrong? Okay, one phrase, COVID-19.
The fund house reported that it had agreed to end its schemes to maintain its valuation at least at current rates because, owing to the shortage of liquidity as a consequence of COVID- 19’s effect on the markets, the interest was diminished due to the combination of redemption pressures and market-based losses. Franklin also noticed that some of the networks closed were specifically linked to rating-spectrum high-yielding securities but most impacted were instruments rated below ‘AAA.’
Thus it is advised for investors to have a look at this strangest market decisions and secure accordingly your invested mutual funds in the Corona Virus spread environment until the market boost up its real capacity.
