Investors will never forget Franklin fiasco

Some debt investors will never forget this date: April 23. Exactly a year ago they saw their investments go out of their reach when Franklin Templeton decided to shut its six debt schemes. Some had big plans with their investments while some were planning to utilize the money for their daily needs.A 45-year-old employee in a financial services company was in for a rude shock when a large sum he had kept for the down payment of his new house in the Franklin India Ultra Short Term Bond Fund became out of reach for him.Similarly, A 56-year- old Interior Consultant in Mumbai had her contingency fund in Franklin India Low Duration Fund. She was planning to use the money for regular expenses as she and her family stopped getting salaries regularly due to the covid-19 pandemic and worsening economic situation.Another 57-year-old government employee had difficulties in taking care of his short-term needs because his money got stuck in Franklin schemes. A longtime investor in Franklin schemes, he was shocked.Stories abound. Shocked investors who had to run around to arrange money or sell their investments to take care of their short-term needs will never forget the Franklin episode. Some of them stopped investing in debt funds. Some investors have become extra cautious.On April 23, 2020, Franklin Templeton India decided to shut six of its debt mutual schemes: Low Duration Fund, Dynamic Accrual Fund, Credit Risk Fund, Short Term Income Fund, Ultra Short Bond Fund and India Income Opportunities Fund. The fund house said it was forced to take the extreme step because of the unprecedented conditions in the debt market due to Covid-19 pandemic.“I had kept a huge amount for the down payment of my dream home in Mumbai. The seller was to fly down to India in April. The entire money was in Franklin India Ultra Short Bond Fund for this short term goal. I thought it is better to keep it for a few months in a debt fund rather than keeping it in a bank account,” says the financial services employee. "On the night of April 23rd, when I got to know that the scheme had been shut, I was in shock. I had lost access to such a big amount that I needed to use in a period of 1-2 months for a house that I didn't want to lose. I ran pillar to post to arrange funds when the seller finally came down to India in September,” he recounts his experience.He recollects how angry he was about not keeping the money in a bank account. Luckily, he managed to convince the seller that he was in this trouble and the seller agreed to not cancel the deal. “Now, after a year, I have got back 68% of my money. As a retail investor, I am happy that I am getting my money back, but I didn't have it when I needed it. Liquidity risk is big and debt investors should learn that from us."The interior consultant in Mumbai was in deep trouble too. “We all, me, my husband and two kids, were not getting paid since the very beginning of the pandemic last year. At that time, anything we had saved up was a blessing for us. It took me some time to believe that I can't access my hard-earned money at a time when I need it the most. It was shocking to say the least,” she says. She had started investing in Franklin India Low Duration Fund some years ago via a mutual fund distributor. “one thing that I kept thinking last year was, it would have been better if I made gold out of that money. At least I could have sold it to get some money in the time of need. I don't think I will invest in any other debt fund now." The 57-year old govt employee has been investing in mutual funds for close to 15 years and has been associated with Franklin funds for more than a decade. For him 'debt funds are as risky as equity funds'. “In 2020, my son had to join a management course and I had to pay the fee. I had a 7-figure amount invested in Franklin's Ultra Short Duration Fund and Income Opportunities Fund, which I could have used for my son's fees. I explored options, figured out sources who can help me with this money when I needed it. Thankfully, I had the means and sources. However, when you have your own money, you shouldn't be in a place where you have to run around,” says the 57-year-old government employee.These investors are happy that they have got some money back. But most of them have second thoughts about investing in debt funds. "The biggest USP of debt funds is liquidity. After 2019, when the credit crisis hit a lot of debt funds, investors had become apprehensive, and rightly so. They understood the credit risk in their portfolios. However, this particular incident, no matter what we say, has left the trust of investors shaken. In my personal experience, investors now call and ask about any NAV dip in debt funds. Those who had investments in the six schemes are particularly apprehensive now," says Harshad Chetanwala, CFP & CO-Founder, MyWealth Growth, a financial advisory firm based in Mumbai. Chetanwala says there were a large number of retirees who ventured into these schemes for two reasons- the reputation and trust on the fund house and the extra returns they managed to give over the years. “Investors always said they understood that extra returns come from extra risk, but till this happened they had no idea of what risk actually means. To have no access to your own money for a year and that too in a year like 2020, is the risk that they had been taking lightly. Second thing, I know investors who had such big sums of money in one of these six schemes. Now they know, no matter how good the fund house or the scheme is, don't concentrate your portfolio," says Chetanwala. He adds that they look at debt portfolios and scrutinize them a lot more than before. This is mainly because investors ask questions about the portfolios. "Are you sure this fund will not end up like Franklin? is one of the constant questions that I get when I recommend a debt fund," says Harshad Chetanwala.

from Economic Times https://ift.tt/3tLXRdV