US-based Franklin Templeton’s investors impacted by its decision to wind up six of its funds in India may have to wait more than five years to fully recoup their money, news aegncy Bloomberg reported on Tuesday. The development is the latest turn in the fiasco after Franklin Templeton Mutual Fund – one of India’s most prominent mutual fund houses in fixed income – shut six debt schemes last month, citing severe market dislocation and illiquidity caused by the coronavirus pandemic. The shock closure of the six schemes in the country’s biggest-ever fund freeze rattled the markets, making investors rush to safer asset classes in a state of panic and forcing the central bank to intervene.
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According to an email from the asset manager to investors, while investments in two of the six funds may be returned within five years, it may take the company more than five years to return the entire amount invested in the other four, Bloomberg reported citing documents confirmed by Franklin Templeton Mutual Fund.
The timing could wind up being sooner, as any sale of the underlying assets in the frozen funds in the secondary market and prepayments or accelerated payments made by issuers of debt in the funds would quicken the payout.
The fund manager had previously said it is seeking investor approval to liquidate the six debt schemes, according to Bloomberg.
The combined assets of the six fixed-income and credit-risk funds, which had large exposures to higher-yielding, lower-rated credit securities, were worth about Rs 28,000 crore.
These funds are: 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.
Days after Franklin Templeton’s move on the six debt fund schemes, the Reserve Bank of India (RBI) announced a special liquidity facility worth Rs 50,000 crore for mutual funds in a bid to ease liquidity pressures in the sector as well as lift investors’ confidence.
Traditional bank deposits gained while spooked investors called for government intervention and debt mutual funds saw record withdrawals.
Retail investors have for long been flocking to tax-friendly debt mutual fund schemes on the promise that they are as safe as bank deposits and with little concern for potential credit risks in case of a default.
Meanwhile, the country’s debt markets have been reeling since the pandemic prompted authorities to institute the world’s biggest stay-at-home restrictions, which worsened liquidity in some corporate bonds. High net-worth individuals, corporate investors and retail investors usually park their funds in debt funds, due to higher returns compared to bank deposits, and easy liquidity.
Already under stress since the collapse of infrastructure financier IL&FS in 2018, the country’s credit markets are still under pressure as the economy has been hit hard by the strict lockdown meant to curb the deadly coronavirus outbreak.