Debt Funds Outlook – aftermath of Franklin Templeton Episode

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On 23rd April 2020, one of the global investment leaders Franklin Templeton closed down 6 of its debt funds (some are best sellers for a decade). In light of the severe market dislocation and illiquidity caused by the COVID-19 pandemic, this decision has been taken in order to protect value for investors via a managed sale of the portfolio.

FT’s Global Chief has partly blamed a rule introduced in October 2019 by SEBI, which mandated MF to cap their exposure to unlisted NCD at 10% of the total corpus of the particular scheme. As per him, anything below AAA-rated is considered a non-investment grade in India. As a chunk of the corpus was invested in such NCD to yield a higher return was over 10%, which made them non-saleable in the open market. Also, few other chapters like Vodafone Idea default, and other regulatory issues, had to close such highly rated funds.

However, it seems to be good for investors, but again people investing in debt funds for high liquidity with higher returns compared to Savings Account and FD has become a bit sceptical about investing in other debt funds also. They have no clue as to where to invest.

Here are some key messages aftermath of FT Episode:

  • Franklin Templeton MF episode is a one-off event and will not have a bearing on the functioning of the entire MF industry or any particular fund
  • The MF industry has put several checks and balances to deal with redemption pressure if any
  • Most of the assets of fixed income schemes have been invested in high rated papers, hence securing the investment
  • Only 5% of the MF industry’s fixed income corpus has been invested in debt papers having a credit rating of less than AA
  • In fact, most credit risk schemes have only up to 25% exposure to risky papers even though these funds are allowed to invest a majority of their corpus in high-risk papers
  • There will be no contagion impact of this episode on other debt schemes

Question is – which debt funds to invest in now?

The answer is very simple –

  • Check the portfolio have AAA-rated papers or having high credit quality portfolio
  • Short / Low / Ultra Short Term Funds are recommended
  • Ask your consultant for good funds for investment

The next question that arises here is whether it is a good time to invest in debt funds. I strictly believe that if you select a well-rated fund with a good credit quality portfolio, you should invest now only and not lose every day’s profit.

So, Invest Now!! Reply to this message with your query/comment with your contact details.

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