Franklin Templeton Ambitious Plan in 6 Debt schemes To chase Yields Landed Investors into Trouble

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Key Points on Franklin Templeton’ s Decision To Close 6 Debt Schemes

  • All these schemes carries high credit risk in this tough environment.
  • Unable to meet Redemption pressure due to low credit ratings of the portfolios.
  • No buyer is available to buy these debt instruments as chances of default in these securities are high.
  • Wrong decisions to add more corporate bonds in the portfolio in Covid-19 environment.
  • A perfect case study for investors to read mutual fund fact sheet before investment.
  • A detail comparison is made in February 2020 portfolio of these schemes with March 2020.

Franklin Templetion

Franklin Templetion decision to close six debt schemes, has surprised every body in the mutual fund industry. These schemes are:

  • Franklin India Ultra Short Bond Fund.
  • Franklin India Short Term Income Plan.
  • Franklin India Credit Risk Fund.
  • Franklin India Low Duration Fund.
  • Franklin India Dynamic Accrual Fund.
  • Franklin India Income Opportunities fund.

These schemes were managing about 26000 crore assets under management (AUM) . This decision is effective from 23rd April 2020.

What it means for Franklin Templeton Debt investors?

Now onward, no new investor is allowed to invest in these schemes. Existing investors will be paid their money as and when the company receives money from these securities. All existing Sips, STPs and SWP comes to an end. As they are not permitted any more.

This has locked the money of investors with no time limit as communicated by the company.

Frankin Templeton Added Corporate Debt

Company’s decision to add more corporate bonds to enhance yields in these schemes as revealed by Feb 2020 and March 2020 fact sheets. This is the prime reason for closure of these schemes.

Lets have a deep analysis of each scheme

Franklin India Ultra Short Bond Fund.

The ambitious plan to enhance yield of the scheme from 9.48% (Feb 2020) to 10.43% (March 2020) as revealed by fact sheets has deteriorated the credit risk profile of the portfolio .

The decision of Franklin Templeton to increase corporate bonds at wrong time. As issuers of these securities (here corporates) are finding tough to meet their debt commitment due to fading profits. As covid 19 has put the economy into standstill.

image 91
Data Source: franklintempletonindia website

It clearly revealed that the scheme has increased its portfolio in corporate debt. Now have a look on the credit rating profile of the portfolio.

Composition of Ratings – Main Portfolio

Assets RatingsFeb-20Mar-20
CRISIL AAA/CARE A1+/CRISILA1+/SOVEREIGN (including call, cash and other current Assets)13.06%-6.70%
CARE AA+/IND AA+/CRISIL AA+/ICRA AA+12.75%13.21%
CRISIL AA/CARE AA-/ICRA AA/ICRA AA-/CRISIL AA-/CRISIL AA(CE)/IND AA/IND AA-/CARE AA(CE)/BWR AA-(CE)/BWR AA-(SO)/BWR AA56.45%69.59%
CARE A+/ICRA A/ICRA A+/CARE A/ICRA A-/CRISIL A+(CE)17.74%23.91%
Data Source: franklintempletonindia website

The table revealed that the company has made a decision to add low quality papers in the portfolio.

Franklin India Short Term Income Plan

In order to enhance yield of the scheme from 11.98% (Feb 2020) to 13.03% (March 2020). It added a low quality papers to the portfolio.

image 92
Data Source: franklintempletonindia website

Composition of Ratings – Main Portfolio

Assets RatingsFeb-20Mar-20
 CRISIL AAA / IND AAA / ICRA AAA / (Including Call,cash and other current asset)7.92%-17.53%
CRISIL AA+ / CARE AA+11.48%16.11%
BWR AA-(CE) / ICRA AA- / CARE AA / BWR AA-(SO) / CARE AA(CE) / CRISIL AA- / CRISIL AA / CARE AA- / IND AA-31.58%42.57%
CARE A+ / IND A / ICRA A+ / ICRA A / IND A+ / BWR A / CARE A+(CE) / ICRA A- / CRISIL A / BWR A+(CE) / BWR A-(CE) / CARE A(CE) / BWR A+(SO) / CARE A / CARE A+(SO) / ICRA A+(CE) / CRISIL A+(CE)43.80%57.58%
CARE BBB- / ICRA BBB+3.42%0.51%
BWR C(CE) / CARE C1.13%0.41%
CARE D/ BWR D0.67%0.35%
Data Source: franklintempletonind

Franklin India Credit Risk Fund

In order to enhance yield of the scheme from 11.41% (Feb 2020) to 12.06% (March 2020). It added a low quality papers to the portfolio.

image 93
Data Source: franklintempletonindia website

Composition of Ratings – Main Portfolio

Assets RatingsFeb-20Mar-20
CRISIL AAA / CARE AAA / (Including Call,cash and other current asset)5.13%-10.29%
CRISIL AA+ / CARE AA+10.15%12.29%
BWR AA-(CE) / ICRA AA / CARE AA(CE) / CARE AA / CARE AA- / CRISIL AA / ICRA AA- / CRISIL AA- / IND AA / BWR AA-(SO)39.06%47.77%
IND A / CARE A / ICRA A+ / ICRA A- / BWR A+(CE) / ICRA A / CARE A+(SO) / IND A+ / CARE A(CE) / BWR A-(CE) / CARE A+(CE) / CARE A+ / BWR A / BWR A+(SO) / CRISIL A+(CE)41.13%49.60%
CARE BBB-2.41%0.00%
BWR C(CE)0.90%0.35%
BWR D1.22%0.28%
Data Source: franklintempletonindia website

Franklin India Low Duration Fund

In order to enhance yield of the scheme from 10.55% (Feb 2020) to 11.52% (March 2020). It added a low quality papers to the portfolio.

image 94
Data Source: franklintempletonindia website

Composition of Ratings – Main Portfolio

Assets RatingsFeb-20Mar-20
CRISIL AAA / ICRA A1+ / IND A1+ / (Including Call,cash and other current asset)10.36%-10.48%
CRISIL AA+6.64%4.97%
ICRA AA- / CRISIL AA(CE) / CRISIL AA- / CARE AA- / CARE AA(CE) / ICRA AA / CRISIL AA / CARE AA30.81%40.79%
CARE A+(CE) / ICRA A / CARE A+ / CRISIL A / CARE A+(SO) / IND A+ / CARE A / ICRA A+ / CARE A(CE) / CRISIL A+(CE)47.56%62.86%
BWR C(CE)3.64%1.60%
BWR D1.00%0.26%
Data Source: franklintempletonindia website

Franklin India Dynamic Accrual Fund

In order to enhance yield of the scheme from 11.26% (Feb 2020) to 11.74% (March 2020). It added a low quality papers to the portfolio.

image 95
Data Source: franklintempletonindia website

Composition of Ratings – Main Portfolio

Assets RatingsFeb-20Mar-20
CRISIL AAA / (Including Call,cash and other current asset)9.46%2.66%
CRISIL AA+ / CARE AA+7.52%8.74%
CARE AA / CRISIL AA / BWR AA-(CE) / ICRA AA- / CARE AA(CE) / CRISIL AA- / BWR AA-(SO) / CARE AA- / IND AA / ICRA AA40.93%44.03%
ICRA A / ICRA A+ / CARE A(CE) / BWR A / IND A+ / CARE A+ / BWR A-(CE) / CARE A+(CE) / BWR A+(CE) / CARE A+(SO) / BWR A+(SO) / IND A / CRISIL A+(CE)39.54%44.05%
CARE BBB- / ICRA BBB+2.01%0.35%
BWR C(CE)0.31%0.12%
BWR D0.23%0.05%
Data Source: franklintempletonindia website

Franklin India Income Opportunities Fund

In order to enhance yield of the scheme from 11.06% (Feb 2020) to 12.03% (March 2020). It added a low quality papers to the portfolio.

image 96
Data Source: franklintempletonindia website

Composition of Ratings – Main Portfolio

Assets RatingsFeb-20Mar-20
CRISIL AAA / SOVEREIGN / (Including Call,cash and other current asset)9.84%-5.27%
CRISIL AA+ / CARE AA+7.37%8.46%
CARE AA / CARE AA(CE) / BWR AA-(SO) / CARE AA- / CRISIL AA- / BWR AA-(CE) / ICRA AA- / CRISIL AA42.75%55.51%
CARE A(CE) / CARE A+ / CARE A+(CE) / BWR A+(CE) / ICRAA / ICRA A+ / BWR A / IND A+ / ICRA A- / CARE A+(SO) / IND A / ICRA A+(CE) / CRISIL A+(CE)39.48%41.19%
BWR D0.56%0.12%
Data Source: franklintempletonindia website

This analysis reveals that adding corporate debt in the portfolio at wrong time resulting in portfolio deterioration. It is the main cause for closure of these schemes.

A lesson for all of us not to chase yields but have an in depth analysis on the quality of debt instrument before investment.

(Also we recommend you to read article on “Hedging an Equity Portfolio During Financial Crisis through protective put”)

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