Franklin Templeton Mutual Fund announced on Thursday that it would close six of its debt schemes in India with immediate effect amid the severe market dislocation and crisis caused by the coronavirus pandemic. The move will lock in about Rs 30,800 crore of investors’ money, according to NDTV.
India’s debt markets have been under stress since the government imposed the lockdown to combat the spread of the coronavirus. Covid-19 has infected more than 23,000 people in India so far and led to the deaths of 718 people.
The six high-risk, high-return credit funds are the Franklin India low duration fund, the Franklin India dynamic accrual fund, the Franklin India credit risk fund, the Franklin India short term income plan, the Franklin India ultra short bond fund and the Franklin India income opportunities fund.
Investors won’t be able to withdraw their money immediately, according to News18. They will have to wait for as long as the scheme’s original duration.
“Due to the ongoing novel coronavirus, or Covid-19, pandemic, liquidity in the bond market has dried up,” Sanjay Sapre, President of Franklin Templeton India, said, according to Moneycontrol. “Yields of debt securities have risen sharply and that has materially diminished the abilities of companies to service their debt. Mutual funds have also been getting a lot of redemption requests. We felt it best under these circumstances to wind up these funds and return the money to investors.”
Franklin Templeton Mutual Fund in India, after analysis and review, decided that winding up these schemes “is the only viable option to preserve value for unitholders and to enable an orderly and equitable exit for all investors in these unprecedented circumstances”, the asset management company said in a statement.
It added: “There has been a dramatic and sustained fall in liquidity in certain segments of the corporate bonds market on account of the Covid-19 crisis and the resultant lock-down of the Indian economy which was necessary to address the same. At the same time, mutual funds, especially in the fixed income segment, are facing continuous and heightened redemptions.”
The closures will be a “jolt to the corporate debt market” in India, Abhimanyu Sofat, the head of research at IIFL Securities in Mumbai, told NDTV. “These funds were one of the top performing for last couple of years due to higher risk being taken by them by lending to lower-rated corporates,” Sofat said. “We believe it’s time for RBI to be even more strong in its intervention in the credit market.”
The head of research and cofounder of Primeinvestor.in, Vidya Bala, called the decision unprecedented. “Having already used up the liquidity to meet large redemptions, they had no choice but to wind up to prevent a run on the funds that would have induced them to sell good-quality paper and hold on to the bad ones,” Bala said.