Why Did Franklin Templeton Decide to Wind Up Six of Its Debt Funds?
Franklin Templeton India decided to wind up six of its debt mutual funds on April 23, 2020, citing severe liquidity challenges in the bond market due to the COVID-19 pandemic. The affected schemes were:
- Franklin India Low Duration Fund
- Franklin India Dynamic Accrual Fund
- Franklin India Credit Risk Fund
- Franklin India Short Term Income Fund
- Franklin India Ultra Short Bond Fund
- Franklin India Income Opportunities Fund
Why Did Franklin Templeton Wind Up These Funds?
Franklin Templeton cited three key reasons for the decision:
- Liquidity Crisis in the Debt Market:
- The COVID-19 lockdown caused a significant liquidity crunch, making it difficult for the funds to sell their lower-rated debt instruments and meet redemption requests.
- High Exposure to Low-Rated Securities:
- The six affected funds invested in high-yield, lower-rated debt papers (AA and below) to generate higher returns. These bonds became illiquid when market conditions deteriorated.
- Massive Redemption Pressures:
- As investors panicked during the crisis, they rushed to withdraw funds, creating a cash crunch for Franklin Templeton. Since the market for lower-rated bonds had dried up, the fund house had no option but to wind up the schemes to prevent forced selling at distressed prices.
What Happened After the Wind-Up?
- Investors Were Locked In: Since winding up means stopping fresh investments and redemptions, investors could not access their money until the funds were monetized.
- SEBI & Legal Battles: The move led to legal disputes, with investors challenging the decision. SEBI and the Supreme Court intervened, eventually allowing orderly liquidation and cash distributions.
- Fund Recovery Process Began: The AMC started selling assets and repaying investors in a phased manner.
Current Status (As of 2025)
- Majority of Payouts Completed:
- Over ₹26,000 crore has been returned to investors as of 2023.
- Investors have received 85-95% of their holdings in most of the six schemes.
- Final Phases of Liquidation:
- The fund house continues to recover and distribute the remaining assets.
- Some illiquid securities and pending dues are still being resolved.
- Regulatory Impact & Lessons Learned:
- SEBI has tightened rules on debt mutual fund investments to avoid similar crises.
- Investors have become more cautious about credit risk funds and liquidity risks.
What Should Investors Do?
- Investors who haven’t received their full amount should check updates from Franklin Templeton and registrar services like CAMS for payout details.
- If there are any pending dues, they will be distributed as Franklin Templeton continues the recovery process.
This move, though difficult, was seen as a way to protect the long-term interests of the remaining investors.
This scenario highlights the critical role that mutual fund distributors and financial advisors play. They help investors make informed decisions, choose funds suited to their financial goals and risk tolerance, and guide them through market uncertainties. In times of market volatility, such as during the COVID-19 crisis, their expertise is invaluable in ensuring a balanced, diversified portfolio that can weather financial storms. Always consult a financial advisor to help navigate complex situations and protect your investments.
