Franklin India’s 6 Closed Debt Funds: (Update) When do you get back money?

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I had written about the Franklin India’s unexpected closure of 6 debt funds in detail earlier here – Franklin India winds down 6 debt funds.

Many investors have exposure to these 6 funds. After all, Rs 25,000+ crore had been invested in these popular debt schemes. So there will be thousands of you who are impacted. And all of the investors have one question in mind – when will I get back the money invested in these 6 Franklin Debt Funds.

As investors, you don’t have any choice but to wait for time being.

But to bring in some clarity about the timelines of returning the money, the AMC has sent an update to the investors.

As a reminder, following are the funds being closed down:

  1. Franklin India Ultra Short Bond Fund (FIUBF)
  2. Franklin India Low Duration Fund (FILDF)
  3. Franklin India Short Term Income Plan (FISTIP)
  4. Franklin India Income Opportunities Fund (FIIOF)
  5. Franklin India Credit Risk Fund (FICRF)
  6. Franklin India Dynamic Accrual Fund (FIDA)

It is important to understand which category these funds belong to. And you will understand why soon:

As a reminder, following are the funds being closed down:

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

As mentioned in the previous related post as well, the categories of debt funds define when the bonds/papers in it will mature:

  • Ultra Short Duration debt funds have average maturity 3 to 6 months
  • Low Duration debt funds have average maturity 6 to 12 months
  • Short Duration debt funds have average maturity 1 to 3 years
  • Medium Duration debt funds have average maturity 3 to 4 years

But this doesn’t mean that all the bonds/papers held by the fund will be maturing in the said average maturity period.

Remember it’s the average. Some will be above it and some will be below it. That’s how averages work.

Note – Updated data (up to 30th April 2020) available at the end of this post.

Now Franklin India has sent out an update (with data upto 23rd April 2020) regarding the maturity profiles of all these 6 funds as follows:

Franklin wind down 6 funds maturity profile

The above table summarizes the maturity amount receivables (as % of overall AUM) on maturity dates or if put option is available, then the immediately forthcoming put option date.

Here is how to read the table using one of the funds.

Look at columned named FIUBF. This is the Franklin India Ultra Short Bond Fund. It belongs to the Ultra Short Duration category, which means that the ‘average maturity’ is between 3 to 6 months:

Franklin Ultra Bond fund maturity profile

So this table tries to tell you that 9% of the bonds are maturing in the next 3 months. About 39% in 6 months, About 50% in next 1 year. About 81% in next 2 years and so on.

Since each fund has its own unique portfolio of bonds maturing at different times and paying out coupon payments in between, the funds will have different cash flows and be able to return money to investors at different points of time as follows (based on Franklin India’s own estimate of their cash flows):

Franklin 6 closed funds money return

I am sure you will ask a question similar to this – If the average maturity of the fund (category is 3-6 months), then why is the fund taking 1 year to give back 50% of the money and nearly 2 years to return a substantial percentage (81%) of the money in this fund?

The answer to this question lies in a technicality known as Macaulay Duration.

I am not going to explain it here. Please search if interested.

But your question is answered by the AMC as follows (its fairly simple to understand) – ‘The Macaulay Duration reflects the average duration of the bonds held in the portfolio basis the expected cash flows of the bond. A portfolio will typically have an average maturity that is slightly longer than the Macaulay Duration. Hence, for example, in Ultra Short Bond Fund, a Macaulay Duration of 4.53 months means the portfolio has an average maturity of 5.27 months. This indicates, in very broad terms, that this is the mid-point of the maturity dates for the bonds held in the portfolio, not the date for the last maturity in the portfolio. Accordingly, you will see that with a Macaulay Duration of 4.53 months, the fund should be able to return around 50% in year 1 and substantial money in 2 years….Further, this cash flow is after taking into account the fact that initial cash flows received will go towards paying the borrowing in the fund, which delays how soon the schemes can start to return monies to unit holders. It may also be noted that these calculations are on a conservative basis and do not consider any sale or prepayments or coupon payment. It will be the endeavor of the schemes to accelerate these payments through actively seeking pre-payments and opportunities to sell in the market while preserving value for unit holders.’

All these details have been made public by Franklin India here. Or if the link doesn’t work then download the document here (for latest data, refer to the update on the end of this post) – it makes for an interesting reading. There is another updated portfolio holdings of all the 6 effected schemes: Data for 23rd April 2020: check here or download it here.

Some additional interesting points made are:

  • Interest income is not considered in the projections. Receipt of coupons will add to the cash flows and accordingly increase payout to investors.
  • On sale of securities in the secondary market, sale value will differ from the maturity value.
  • Securities sold in the secondary market prior to the maturity will accelerate the receipt thereby facilitating payout to investors before scheduled maturity.
  • Prepayments or accelerated payments made by the issuer will prepone the receipt thereby facilitating payout to investors before scheduled maturity.

That’s more or less about the update.

The key point to note here and for the worried investors is that the money will be returned back to the investors.

You already have a fair idea now about when and what timelines it would possibly follow in a staggered manner.

How much of the money will return? The answer depends on the valuations at which the AMC is able to sell their underlying holdings before maturity (early exits or sale/prepayments) to facilitate repayment prior to the maturity of the portfolio investments. And also depending on whether or not some bonds face any defaults.

What can you do as an investor in any of these 6 funds being winded down?

Not much. There is no further action required. The AMC will sell the underlying securities and return the realized money in a staggered manner over a period of time as indicated the above tables. So basically, it’s a wait and watch mode for investors now.

Updated (30th April 2020):

New maturity profile:

For more details and data updated till 30th April 2020, use this link) For updated portfolio holdings of all the 6 effected schemes check here.

1 comment

  1. Why NAV is getting reduced being close ended fund ? They would have stopped trading in secondary market.

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