Six Fund of Funds of Franklin Templeton also impacted by debt funds shut down

Six Fund of Funds (FoFs) from Franklin Templeton India mutual fund have also been impacted by the recent announcement of winding up of its six debt funds. They are Franklin India Dynamic Asset Allocation FOFs, Franklin India Multi-Asset Solution, Franklin India Life Stage FOFs-20, Franklin India Life Stage FOFs-30, Franklin India Life Stage FOFs-40 and Franklin India Life Stage FOFs-50 Plus.

They have a combined exposure of around ₹422 crore (as of March 2020) in two of its funds that the AMC has recently wound up. The total AUM of these FoFs as of March 2020 was ₹933 crore.

Due to the unprecedented levels of redemptions following the COVID-19 outbreak and lockdown, effective from April 23, 2020, Franklin Templeton India AMC has wound up six of its schemes – Franklin India Ultra Short Bond, Franklin India Short Term Income, Franklin India Dynamic Accrual, Franklin India Credit Risk, Franklin India Low Duration Fund and Franklin India Income Opportunities Fund. However, NAV of these schemes will be declared as usual. AMC will repay the investors in a staggered way whenever the money is coming in the form of maturities and coupon payments.

Fund of Funds

The six FoFs have a significant exposure in the two of its suspended schemes.

Of these, four fund of funds --Franklin India Life Stage FOFs-20, Franklin India Life Stage FOFs-30, Franklin India Life Stage FOFs-40 and Franklin India Life Stage FOFs-50 Plus have an exposure of 13 per cent, 29 per cent, 52 per cent and 38 per cent respectively in the suspended Franklin India Dynamic Accrual Fund. The value of the exposure as on March 2020 was ₹1.1 crore, ₹ 1.3 crore, ₹3.2 crore and ₹4.3 crore, respectively.

Two FoFs --Franklin India Dynamic Asset Allocation FOFs and Franklin India Multi-Asset Solution Fund had exposure of 46 per cent and 50 per cent respectively in the suspended Franklin India Short Term Income Plan. The value as on March 2020 was Rs 400 crore and Rs 12 crore respectively.

Fund of Funds (FoF) is a mutual fund scheme that invests in other schemes of mutual funds.

What does it mean for FoF investors?

NAVs of these FoFs will be declared as usual. However, few things investors should note.

One, performance of these FoFs will be impacted notably as a portion of the portfolio turned inactive. These FoFs can either hold or mark down the value of these suspended schemes. But, whenever the money is received from these suspended schemes, the FoFs may redeploy in other good schemes of the AMC.

Second, These FoFs will be hit badly if there is any occurrence of credit quality issue in the bonds held by the suspended schemes.

Third, redeeming the units of these FoFs may not be a big issue, it seems, as they hold other funds which can be liquidated easily. But huge redemptions will drag down the performance of these funds.

Finally, investors should keep eye on the regular updates from the AMC and take appropriate action accordingly.

Update from the AMC

Responding to our query, Franklin Templeton India AMC has clarified, ‘’Pursuant to the decision to wind up Franklin India Short Term Income Plan (FISTIP) and Franklin India Dynamic Accrual Fund (FIDA), announced on April 23, 2020, the investments by the Fund of Fund Schemes in the above mentioned underlying schemes that are wound up were illiquid effective April 24, 2020. Hence, considering the immediate illiquidity of the investment, these funds were fair valued. We are re-working the underlying asset allocation of the fund of fund schemes and will intimate the changes to investors shortly”.

After such fair valuation made in the portfolio, the NAVs of these six FoFs dropped significantly ranging 6.6-25.2 per cent as on April 24.