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Why did Franklin Templeton close most of its debt funds on the 23rd of April 2020?

On 23rd April 2020, Franklin Templeton Mutual Fund has voluntarily decided to shut down its six open-ended debt funds. The closed schemes followed the high-risk, high-return credit risk strategy. The fund will now pay the investors in a staggered manner by selling its underlying securities over a period of time.

The six schemes are as follows;

  • Franklin India Low Duration Fund,
  • Franklin India Dynamic Accrual Fund,
  • Franklin India Credit Risk Fund,
  • Franklin India Short Term Income Plan,
  • Franklin India Ultra Short Bond Fund and
  • Franklin India Income Opportunities Fund.

Reason for the shut down

These schemes cumulatively manage assets worth Rs. 28,000 crore. These six schemes have been shut down because the company believes that the market is not returning to normalcy in the near future due to the corona virus impact. The lockdown due to Covid-19 has led to risk aversion amongst the investors. Due to this, the lower-rated and unrated papers are not finding the buyers. The yield on these lower-rated papers are high and there is no price discovery. This has forced the fund to shut down these schemes.

What does it mean for the investors?

Since the scheme has been closed down, the investors will not be able to withdraw their money soon. The unit holders will be paid when the securities mature in the portfolio. However, if the fund sees that the situation is improving, it will try to sell the securities in the market. Also, they would not resort to distress sale of securities. Therefore, from 24th April onwards, the investors will not be able to withdraw their investments, make fresh purchases of these funds, transfer to equity schemes, or make withdrawals to meet their monthly expenses.

The bottom line

Mutual funds are an excellent investment vehicle for long term wealth creation. However, it is ideal to seek help from professional experts like Indira Securities before investing in mutual funds.

 

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