Franklin Templeton’s Wind-Down Triggers Biggest Monthly Outflow From Credit Risk Schemes

Credit risk schemes saw the biggest ever outflow in April as Franklin Templeton Mutual Fund’s decision to wind up six plans citing liquidity issues during Covid-19 disruption spooked investors.

Investors pulled out Rs 19,239 crore from credit risk schemes in April, according to data released by the Association of Mutual Funds in India. While the schemes have been witnessing outflow for more than a year, last month was particularly bad.

“The debt market was rocked by a catastrophic event when Franklin Templeton closed six of its debt schemes. The implications of which are far deeper when compared to the IL&FS crisis which devoured lakhs of investments by Indian investors,” Tarun Birani, founder and CEO at TBNG Capital Advisor, said. “The cascading effects of this closure can be seen in the debt category that has maximum exposure to credit risk securities.”

“A substantial jump in outflow for credit risk fund certainly proves the lack of faith of investors in credit risk securities. The impact of an uncertain pandemic, coupled with the lockdown of businesses that hurts incomes and revenues, is seen in the decline of equity inflows,” he said.

Franklin Templeton closed six of its credit risk schemes--that invest in lower-rated paper-- with assets worth more than Rs 25,000 crore because of redemption pressure and lack of liquidity in the bond market.

Securities and Exchange Board of India on Thursday asked Franklin Templeton to focus on returning money to investors at the earliest. The regulator also flagged that some mutual funds continued to invest in opaque debt instruments despite regulatory changes to safeguard investors after the 2018 crisis.

Franklin Templeton has caused fresh concerns about debt schemes. It follows a year-and-a-half of turmoil for debt markets, starting with the defaults at IL&FS Group in 2018 and followed by troubles at Essel Group, Cox & Kings (India) Ltd. and Anil Ambani's Reliance Group. That prompted mutual funds to either write down or offer standstills on investments or share sales.