Franklin Templeton India shut down 6 debt schemes. The schemes were yield-oriented debt funds. But coming at a time like this, it has left the investors concerned.
BOOM's Govindraj Ethiraj spoke to Vishal Thakkar, Co-Founder, ConTeTetra Universal and Neville Poncha, Founder, IntelX Money.
'Right now, no action is the best action because if you look at something and it looks like opportunity and you try to grab it, it might just turn out to be a fallen axe. It might just cut your hand. If you have parked money for long term, you continue doing your long term investments and if you are running short of liquidity, you can cut down on your SIPs because you will need money for your expenses,' says Vishal Thakkar
'I think what investors should do is relook at their portfolios. Investors can easily choose 'AAA' funds. The simplest category to invest in if you have a long term horizon is the corporate bond category and if you have a short term horizon is the money market category or the liquid fund category,' says Neville Poncha.
This episode of From The Frontlines is transcribed below:
Franklin Templeton, a leading mutual fund in India pulls down six of its schemes. The schemes were what they call, yield-oriented debt funds, so essentially these are different from equity, and are invested in different kind of instruments. The total asset under management (AUM) in these six schemes adds up to Rs 2600O crores. Now, this amount, we are told by the Association of Mutual Funds of India (AMFI) is less than 1.4% of the entire assets under management by the Indian mutual fund industry. However, coming at a time like this, it obviously sets off warning bells, it causes concerns among investors. We all want to know, what is going to happen, if particularly debt funds that are traditionally and supposed to invest in safe harbour assets are also either closing or holding off their redemptions. Redemptions is when you and I ask for the money back, we get it. In this case, we are not getting it because the fund is saying that it will pay it out in a staggered manner. So, let us try and understand why this has happened, what it means for the people who are invested in the mutual fund industry, in a very simple explainer format. To do that I am joined by two experts in personal finance and investing Vishal Thakkar, ConTe Tetra Universal and Neville Poncha, Founder, IntelX Money.
Govindraj Ethiraj: Neville, let me start with you. Franklin is a big name, there is no doubt about that. But this also is not all of Franklin, one part of Franklin's assets, which is these six funds have shut down. So how are you reading it?
Neville Poncha: What has happened is, it has definitely affected investors and we have got a flurry of calls since the morning, asking us about how our money is safe...The funds that have been affected are the funds that have invested in, say slightly, riskier paper—this is not the AAA paper, which people normally think of when investing their papers. There are also some papers which will be of slightly longer maturity—3-4 years. What we have seen in the last couple of months is that there has been a is a flag to quality and there
has been a bit of the liquidity issue. We had liquid funds, which are even safer than this, giving negative returns, so many of the investors just moved their money out of their market. So, I think this is just a liquidity issues and when AMFI says it is a small portion, it is a small portion of the total mutual fund AUM and hopefully in a staggered manner, we should get payouts.
Govindraj Ethiraj: Vishal, how are you seeing this. I am sure that you are also seeing getting calls and you also advise a lot of people on the fundamentals of investing. So, what are the fundamentals looking like here?
Vishal Thakkar: These are unprecedented times. It has definitely shaken the confidence of investors because when we see that our money is not going to come back, or it may come back in a staggered manner, and there are no assured timelines given, there are concerns that are there. But there is no reason to panic as Franklin Templeton has just closed only six schemes. However, at the same time it is definitely a red flag. But one needs to understand slightly in detail that when we say that debt funds are traditionally considered safer, we must look at risk adjusted returns for these funds. If you look at the last one year, there is hardly any debt-oriented fund, which on a risk adjusted basis, would have given anything more than a bank deposit. Infact, the concerns were so high, that SEBI had come up with mandates and notifications, where they have put checks and balances on what a fund manager can or cannot do, so far as a debt-oriented mutual funds are concerned. There are sectoral caps—unlike good old days, a fund manager just cannot strike a sweet deal with a large corporate house and pick up a large chunk of their papers. And in terms of the risk, some of the schemes are actually way more riskier than they are perceived by the market. Especially if they are credit linked, as my fellow colleague rightly said, is not AAA rated. So definitely there is a possible cause of concern for the investors and that is the reason why we have seen a chunk of withdrawals in the recent times as well.
Govindraj Ethiraj: To most lay investors, people who particularly invest with the systematic investment plans (SIPs) would not really know—I was just looking at the names. {Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund}, I mean these names do not tell you anything. If someone says, these are the debt funds and these are six different kinds of debt funds, obviously a normal person is not going to know. Or will they?
Vishal Thakkar: See, for a normal person, an adviser would tell him, that as a part of balancing your portfolio, a good percentage of your money should be going in debt fund, because historically, equities are perceived to be risky. This is at the asset allocation level, but when it comes to the scheme allocation level, I do not think, in our country we have the healthy practice of disclosing by the advisors to which particular schemes are being chosen or if at all the material is circulated, I do not think our retail investor would have time, interest or bandwidth to go into so much of details. The fact that they have already appointed an advisor, and they would expect the advisor to act in a fiduciary capacity. So, having said that for the retail investor, this nomenclature would hardly make any sense.
Govindraj Ethiraj: I know as we go forward, the one lesson is that One learning that even for debt funds, one needs to read the fine print more carefully. So, Neville, what is the fine print that people should have read or missed in this case?
Neville Poncha: I think in this case there have been a couple of warning signs and flags raised earlier also. A couple of their earlier investments did run into problems. They were segregated earlier also. So, I think that should have been a bit of wakeup call for investors. But you are right, an investor will not really figure out the difference between one AA company and another AA company. The simple metric that we use when we are talking to our clients is that, we show them the portfolio and ask them how many of these names can you identify yourself. If you cannot figure out what this company really does or have never heard of this company—do not invest in a fund, where you do not know where the money is going. A lot of people will then say that my adviser will handle this, my fund manager will take care of all this but in the end if somebody does go wrong. Because the fund manager is going as per the mandate, in a credit risk fund, he has to take credit risk. He cannot put papers. It is easy for the investors to choose the fund correctly. There is a SEBI categorisation that helps; you do not have to go by the name of the fund but look at the category of the fund. And that is what the investor should do going forward.
Govindraj Ethiraj: Neville, the other important point is a lot of these investments that are being pulled out from these funds, are being pulled out by companies. Not necessarily, individuals because they themselves are facing liquidity challenges, because their income streams might have slowed down, they are still paying salaries, they are managing their enterprises...So, we are in an unusual situation in a much broader sense. So, if we were to assess the environment as a whole rather than the specific symptom that we have caught here.
Neville Poncha: Given that the environment is challenging, we have seen investors—company investors, HNIs and even small retail investors—looking to move to more liquid categories. Many investors have done it and we have seen categories like overnight funds, which were very small a year ago are quite large now. Some investors have understood the risk of liquidity, some have not understood the risk of liquidity. But there is not much you can do, if tomorrow a large corporate, or a bunch of corporates, one time move out. As I said we saw it last month, where you know people moved out of liquid funds and we got negative returns. Honestly, there is nothing one can do as an investor to take care of those risks.