"Investments in mutual funds are subject to market risk. Please read the scheme related document carefully." There will be very few people who will not be able to recall this cautious phrase about mutuals funds. Mutuals funds are indeed risky so does any asset class you invest in. Each asset class comes with its own risk and reward. The money you save in your home has the risk to be get stolen or lost. In financial terms, it also has a risk of value depreciation due to inflation. Stocks, Bonds, Gold and mutual funds have their own risk. Even looking at recent bank scenarios, Moratorium on Yes bank and PMC Bank crisis, keeping money in banks seems to be unsafe. Though all asset bears some risk, some assets are riskier than the other.
Keeping your money in the bank is safer than investing in stocks and bonds. But shrewd investment in stocks provides a far superior return on your money than just keeping that money in the bank and receiving negligible interest on it. But keeping up with all the financial news and jargons, and juggling through the financial reports of a company is not everyone's cup of tea. Mutual funds can provide the best of both worlds. Money is handed over to finance professionals and they invest your money in different asset classes. They take a cut from your money invested and promise to give a good return on your money.
Mutual Funds are portrayed as a safer option to park your money by these financial professionals. Huge marketing campaigns are run by broking companies and banks to put it in your mind that your money in their hands has no risk at all. Flashing higher returns on previous schemes, catchy lines and inducing fear of missing out, they can lure even astute investor to invest in their schemes.
Franklin Templeton is one such company in this investment space. It is the biggest cross border fund management group in the world operating in 17 countries around the globe. Its Indian Subsidiary, Franklin Templeton India, is 9th largest asset management company in India managing around average Rs. 1.16 trillion in total assets in 2020.
On 24th April 2020, in an unprecedented move, Franklin Templeton India winds up 6 mutual funds schemes running in India with a total asset base of around Rs. 30,000 crores citing liquidity concerns and redemption pressure. These mutual funds were high yield generating debt-based funds which invest in corporate and government debts. After winding up no one can get in or out from these schemes. All the investments and withdrawals were halted affecting many people. Among them are many retirees which had invested a huge sum of money in the debt-based fund as they are more secure and less volatile than the equity-based fund. The schemes being wound up are
Low Duration Fund,
Dynamic Accrual Fund,
Credit Risk Fund,
Short Term Income Fund,
Ultra Short Bond Fund, and
India Income Opportunities Fund.
Franklin Templeton India had posted huge returns on their schemes and was known for its excellent risk management in the area of debt investments. Until 2006 Franklin Templeton performance was in line with its other peers. After that Franklin Templeton changed the way mutual fund industry worked. Taking risks for higher returns became the new normal in Franklin Templeton. Franklin Templeton started investing in low rated companies and bonds. According to Bussiness Standard, At one time Franklin Templeton was only a single investor in 36 out of 88 bonds they invested in. This risk appetite worked well in the times of the thriving economy. All these 6 schemes have posted handsome returns from the period of 2015 to 2019. The downfall started in 2016 after the government of India made 86 % of circulating currency illegal overnight. This put many small firms out of the business and started a snowball effect in the mutual fund's industry. The upcoming years were more challenging for the Indian economy. In 2018, Infrastructure Leasing & Financial Services (ILFS) defaulted on its loan payment and prostrated the Indian NBFCs (Non-Banking financial services) market into dust. Many mutual funds are invested in these NBFCs now started facing the redemption pressure from the holder of there
schemes. The last nail in the coffin was hammered in this fragile economy by COVID-19 crisis. When the businesses were closed and they are unable to pay their interest payment on time. In these periods Franklin Templeton
continued its investment in high-risk firms like Reliance ADAG, Vodafone Idea, Yes Bank, DHFL, Essel Group and much lesser-known with very low credit rating. One by one these companies started defaulting on their payments which didn't pan out good for Franklin Templeton.
The crisis of companies defaulting on their payments was lurking over the Franklin Templeton while the mutual fund holders were in a hurry to redeem their money from the schemes. Usually, the redemption measures like reserve cash, interest payments, laddering (Investing in different maturity bond) and the influx
of new investment are employed to cover the predicted redemption from the scheme. This time all the measures were dried off as no one interested in the fresh investment of their money in this time of crisis and companies were unable to pay there scheduled payments on time. Franklin Templeton had to borrow money from the bank to cover redemption and sell its good rating bonds at discount prices to cover redemptions but these measures were not sustainable for a long time. The bet of Franklin Templeton to invest in risky bonds backfired them and in the end, they have to close their six mutuals funds.
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