Debt Schemes of Franklin India

Debt schemes of Franklin India Mutual Fund are in the news due to their exposure in the troubled Vodafone-Idea papers.

• Debt schemes of Franklin India Mutual Fund are in the news due to their exposure in the troubled Vodafone-Idea papers. Some of the debt schemes of the AMC are also giving negative returns in the last one year. What should investors do?
• The NAVs of Franklin’s debt schemes took a huge hit in a single day as on 16 ^th Franklin India Low Duration Fund fell by around 7%. Franklin India Income Opportunities fell by 5%, Franklin India Credit Risk Fund fell by 5%, Franklin India Short Term Income Plan fell by 4.5%, Franklin India Ultra Short Bond Fund came down by 4.4% and Franklin India Dynamic Accrual Fund fell by 4.3%.
• One year returns of these schemes are -2% for Franklin India Low Duration Fund, 0.05% for Franklin India Income Opportunities, -1.03% for Franklin India Credit Risk Fund, -0.45% for Franklin India Short Term Income Plan, 4.65% for Franklin India Ultra Short Bond Fund and 1.80% for Franklin India Dynamic Accrual Fund.
• Most debt investors were betting big on Franklin Templeton’s debt schemes over any other debt investment product for their short term needs until about a year ago. They were fascinated by over 9% returns that these schemes had given most of the time in the past. But now the scenario has changed.
• This is not the first time that these schemes have been hit. The NAVs of four debt schemes of Franklin Templeton Mutual Fund namely, Franklin India Low Duration, Franklin India Short Term, Franklin India Credit Risk and Franklin Dynamic Accrual were hit due to their exposure in Essel Infra projects earlier as well. The NAVs fell down in the range of 0.39% to 1.98% in a single day on Dec 5 last year.

Let us compare the schemes’ performance over a decade to get a better understanding of how severe the problem with Franklin schemes is.

1. Four of the Franklin Templeton’s short term debt schemes have performed the worst in 2019, compared to the last seven to 10 years annual performance.
2. Franklin India Credit Risk Fund has given 3.99% returns in 2019, the lowest since 2012. The scheme was launched in December 2011.
3. Franklin India Short Term Income Plan has given 4.23% in 2019, lowest in a decade. Similarly, Franklin India Low Duration Fund has generated 5.18% in 2019, lowest in the last 9 year, since its launch.
4. Franklin India Income Opportunities Fund has given 5.20% in 2019, lowest in a decade.

• Mutual Fund advisors believe multiple write offs in most of short term schemes of Franklin Templeton Mutual fund has resulted in lower return in the calendar year gone by.
• “Franklin’s short term schemes had a huge exposure to low-rated debt papers. They were actually managing most of these schemes as a credit risk fund only. That is how these schemes were giving market beating returns. Unfortunately, in the last one year, there have been multiple write offs due to the series of defaults and downgrades of NBFCs, which impacted their returns,” says Chokkalingam Palaniappan, Director, Prakala Wealth Management .
• Currently, Franklin India Low Duration has 37% of its portfolio exposed to AA rated papers, higher than the category average exposure of 22%. Also, while the category on an average has 40% of its portfolio in AAA rated papers, the scheme has only 1% in the top rates papers.
• Similarly, Franklin India Short Term Fund has 39% in AA rates papers as against category average of 24%. The scheme has only 7% in AAA papers against 61% category average.
• This shows how risky these schemes were when compared to their peers.
• However, mutual fund advisors also believe that if no more defaults and downgrades happen, the scheme will be able to recover in a few months time.
• “The schemes still have a yield to maturity of around 12%. And if no more defaults and downgrades happen, the scheme will be able to recover in a few months. But this does not make them less risky,” says Palaniappa
• Franklin India low Duration Fund as a YTM of 12.34%. Franklin India Short Term Income Plan has a YTM of 13.01%, Franklin India Income Opportunities has 12.48%.
• Yield to maturity or YTM is the rate of return anticipated on a bond if held until maturity. YTM of a mutual fund scheme is the weighted average YTM of securities held in the portfolio.