The unprecedented lockdown of the Indian economy in the wake of Covid-19 has impacted livelihoods and businesses across the country. Despite several measures by the Reserve Bank of India (RBI), the liquidity in certain segments of the corporate bond markets has fallen-off dramatically and has remained low for an extended period.
In this scenario, mutual funds are facing unprecedented liquidity challenges due to a variety of factors – rising redemption pressures due to heightened risk aversion, mark to market losses following a spike in yields and lower trading volumes in the bond markets. These factors have together caused a significant and worsening liquidity crunch for open-end mutual fund schemes investing in corporate credits across the credit rating spectrum.
In this situation, we find that the ability to liquidate assets at a reasonable price to fund redemptions for the schemes identified below is under severe stress and it is no longer possible for certain schemes of Franklin Templeton to generate adequate liquidity to fund daily redemptions. Accordingly, we wish to inform you, that the Trustees of Franklin Templeton Mutual Fund in India have, after careful analysis and review of the recommendations submitted by Franklin Templeton AMC, and in close consultation with the investment team, voluntarily decided to wind up its suite of six yield-oriented fixed income funds, post cut-off time from April 23, 2020 (refer to Annexure I – Notice to Investors) as they are of the considered opinion that an event has occurred, which requires these schemes to be wound up. This decision has been taken in light of the severe market dislocation and illiquidity caused by the Covid-19 pandemic, and in order to protect value for investors via a managed sale of the portfolio. The list of schemes being wound up is as follows:
1. Franklin India Ultra Short Bond Fund (FIUBF)
2. Franklin India Short Term Income Fund (FISTIP)
3. Franklin India Credit Risk Fund (FICRF)
4. Franklin India Low Duration Fund (FILDF)
5. Franklin India Dynamic Accrual Fund (FIDA)
6. Franklin India Income Opportunities Fund (FIIOF)
The impacted schemes of Franklin Templeton were able to meet their redemption payment obligations across all market conditions and even during the initial phase of the Covid-19 pandemic lockdown despite redemption pressures and increased market illiquidity. However, the extension of the lockdown has heightened redemption volumes and reduced inflows to unsustainable levels. The schemes even resorted to borrowings within permissible limits in line with market practice to fund redemptions during this time but given the situation, we felt that it would not be prudent to leverage the schemes further. While the respective valuations of these schemes have been marked promptly and conservatively thus far, continuous redemption pressures in the backdrop of a severe dislocation in the corporate bond markets would place great strain on our ability to ensure equitable treatment of all investors. Further, given the current unprecedented situation, even the committed borrowing lines maintained by the funds are inadequate to meet the demand for sustained borrowing across the schemes.
We explored the possibility of suspending redemptions until market conditions stabilize without winding up the schemes. However, conditions for such a suspension under the current regulatory framework, such as a maximum suspension period of 10 working days (in 90 days) and the requirement to honour redemptions up to INR 2 lakh per day per investor, rendered this approach unviable to meet the severe sustained impact of the current crisis (refer Annexure III – FAQs for options considered besides winding up).
The Trustees were hence left with no option except to initiate the winding up of the schemes with a view to protect the interests of unitholders. Winding up the schemes was determined to be the best way to ensure a fair and equitable distribution of monies to unitholders while minimizing erosion in value for investors.
a. Suspension of Purchase and Redemption: The 6 wound up schemes are no longer available for subscription or redemption post cut-off time from 23 April 2020. All Systematic Investment Plans (SIP), Systematic Transfer Plans (STP) and Systematic Withdrawal Plans (SWP) into and from the above-mentioned funds stand cancelled post cut-off time from 23 April 2020.
b. Distribution of monies from Fund Assets: Following the decision to wind-up the schemes, we will now proceed to assist the Trustees with orderly realization and liquidation of the underlying assets with the objective of preserving value for unitholders, and with distribution of the proceeds thereof to the unitholders after discharging the liabilities of the schemes. It will be our endeavour to liquidate the portfolio holdings at the earliest opportunity, to enable an equitable exit for all investors in these unprecedented circumstances. We would also continue to explore opportunities to monetize assets through secondary transactions, once the market stabilizes. We will aim, subject to the limitations under Regulation 41, to make regular payments to investors from portfolio maturities, coupon and pre-payments, once the borrowings in the funds have been paid back. To understand the details of the payment process during the winding up, please refer to Annexure II.
c. Tax Implications: The amount received by investors are in the form of redemption of units and would, where such amount or part thereof represents a gain for the investor, be taxed as capital gain in the hands of investors depending on inter alia the period of their investment in the scheme. It is best to take advice from a tax expert as impact could vary depending on the investor status and income.
The decision to wind up these funds was an extremely difficult one, but we believe it is necessary to protect the interests of our investors in the current unprecedented economic environment. It is not a reflection of the integrity of these funds or any form of write-offs but only in response to the significant liquidity challenges faced as a direct result of the Covid-19 pandemic and related lock-down. The underlying securities held by these funds remain sound and we remain aligned with the interests of our investors, with an aim to assist the Trustees to fully exit these funds at the best possible value.
Franklin Templeton manages an additional 27 open ended schemes, 24 close ended and 6 fund of funds schemes with approximately INR 50,000 Crore of AUM in fixed income, equity, hybrid, overseas, feeder and multi-asset schemes which are not impacted by the winding up process. We continue to manage these schemes in line with their investment mandate with a view to delivering superior investment outcomes for our investors.
Franklin Templeton has a long history of over 25 years in India, with a third of our global employee strength based here. Our commitment to India and our investors remains steadfast. We seek your support in these challenging times and hope you will continue to repose your faith in us.
Please refer to Annexure III – FAQ document for more information.
Franklin Templeton Mutual Fund
Indiabulls Finance Center, Tower 2, 12th and 13th Floor, Senapati Bapat Marg,
Elphinstone Road (West), Mumbai 400013
NOTICE is hereby given that Franklin Templeton Trustee Services Private Limited has decided to wind up following schemes of Franklin Templeton Mutual Fund pursuant to the provisions of regulation 39(2)(a) of the SEBI (Mutual Funds) Regulations, 1996 (Mutual Fund Regulations).
There has been a dramatic and sustained fall in liquidity in certain segments of the corporate bonds market on account of the Covid-19 crisis and the resultant lock-down of the Indian economy which was necessary to address the same. At the same time, mutual funds, especially in the fixed income segment, are facing continuous and heightened redemptions.
The Trustees of Franklin Templeton Mutual Fund in India, after careful analysis and review of the recommendations submitted by Franklin Templeton Asset Management (India) Private Limited (the AMC), and in close consultation with the investment team, are of the considered opinion that an event has occurred, which requires these schemes to be wound up and that this is the only viable option to preserve value for unitholders and to enable an orderly and equitable exit for all investors in these unprecedented circumstances.
Individual emails are being dispatched to the unitholder(s) with respect to the above.
Pursuant to regulation 41(1) of the Mutual Fund Regulations, approval of the unitholders of the respective schemes will be sought separately.
We propose to seek such approval through electronic or other appropriate means as far as circumstances permit.
Pursuant to Regulation 40 of the SEBI (Mutual Funds) Regulations, 1996 on and from April 24, 2020 the Trustee and the AMC have:
(a) ceased to carry on any business activity in respect of the Schemes;
(b) ceased to create or cancel units in the Schemes;
(c) ceased to issue or redeem units in the Schemes.
The Trustee or the person(s) authorised by it will continue to realise and / or dispose-off the assets of the Schemes in the best interest of the Unit holder(s). The sale proceeds after discharge of all liabilities and expenses will be paid to the Unit holder(s) in proportion to their respective interests in the assets of Schemes.
It may be noted that a Unit holder whose name appears on the register of Unit holders at the close of business hours of April 24, 2020 shall be entitled to vote on the matter under regulation 41(1) as set forth above. If none of the Unitholder(s) participate, the Trustee or the person so authorized shall assume the authority to take steps for winding up of the Schemes. Investors who have not registered their email id are requested to register their email id with us at the earliest.
For Franklin Templeton Trustee Services Private Limited
(Trustee to Franklin Templeton Mutual Fund)
Date: April 23, 2020
Pursuant to the 6 schemes being wound up, the schemes would cease to offer investor led redemptions. The following approach will be adopted in making repayments to investors of their share in each scheme:
1) All receipts from sale/maturity would be first allocated against outstanding borrowing and other liabilities of the scheme in accordance with Regulation 41(2) of the SEBI Mutual Fund Regulations.
2) Amounts received in excess of the scheme’s borrowing would be distributed to investors in proportion to their share in the scheme’s net assets after accounting for scheme liabilities and expenses.
It will be our endeavor to liquidate the portfolio holdings at the earliest opportunity having regard to portfolio maturity and the current risk averse and illiquid market scenario. Once the market recovers from the current Covid-19 situation, early exits via sale/prepayment will be actively explored with a view to facilitate repayment prior to the maturity of the portfolio investments. We would share updates with investors on these schemes at regular intervals. On payment to investors, proportionate units would be redeemed.
The amount received by investors are in the form of redemption of units and would, where such amount or part thereof represents a gain for the investor, be taxed as capital gain in the hands of investors depending on inter alia the period of their investment in the scheme. It is best to take advice from a tax expert as impact could vary depending on the investor status and income.
1. Please provide more details of the schemes being wound up
|S No||Name of the Scheme||
Scheme Characteristic (based on Macaulay duration or credit rating) as stated in the scheme information document
|Macaulay Duration in Years as on 22 April 2020|
|1||Franklin India Ultra
Short Bond Fund
|Investing in instruments with Macaulay duration between 3 months and 6 months||0.38|
|2||Franklin India Short Term Income Fund||Investing in instruments with Macaulay duration between 1 year and 3 years||2.41|
|3||Franklin India Credit
|A bond fund focusing
on AA and below rated
corporate bonds (excluding AA+ rated
|4||Franklin India Low
|Investing in instruments with Macaulay duration between 6 months and 12 months||1.17|
|5||Franklin India Dynamic Accrual Fund||Investing across duration||1.95|
|6||Franklin India Income
|Investing in instruments with Macaulay duration between 3 years and 4 years||3.94|
2. You were borrowing to meet your redemptions, why didn’t you continue to borrow?
The schemes have been meeting their redemption payment obligations since inception across all market conditions and were even able to do so during the initial phase of the Covid-19 pandemic related lockdown despite heightened redemption pressures and increased market illiquidity. However, the unprecedented situation arising out of the Covid-19 pandemic has heightened redemption volumes and reduced inflows. It has also disrupted the normal functioning of the debt markets, particularly the credit markets, severely hampering the ability of the Investment Manager to liquidate securities held in the portfolio. While the RBI stepped in with a package of rate cuts and Targeted Long-Term Repo Operations (TLTRO), the same has not helped these schemes to find the required liquidity, as the demand for liquidity in AAA rated papers itself was overwhelming. The current risk averse environment has further led to a sharp drop in interest in papers below the AAA rating band or papers not issued by select issuers.
The schemes had to resort to continuous borrowing to fund redemptions during this time, and were unable to repay the borrowings through sale of portfolio securities due to the prevailing market environment. High levels of borrowing can magnify the effects of any negative credit events in the portfolio, and while permitted for a period of up to six months, is generally not recommended to manage long term asset liability mismatches. With increasing uncertainty about the length, severity and impact of the Covid-19 pandemic related lock-down, the Investment Manager did not believe it was prudent to continue funding redemptions through potentially increasing levels of borrowings. Further, while Franklin Templeton carries significant committed borrowing lines with banks to tide over short term liquidity challenges, due to the current market situation, many schemes of Franklin Templeton were required to resort to borrowing to fund redemptions, leading to the risk that even the committed lines would be inadequate to meet the demand for sustained borrowing across the schemes.
3. Why do you anticipate the liquidity stress to continue further?
We anticipate continued liquidity stress for our funds, and for the industry, for the following reasons:
4. What were the steps taken so far by Franklin Templeton to meet redemptions?
We have taken the following steps to ensure redemptions are duly paid:
Borrowing: The regulation allows the Mutual Fund schemes to borrow funds up to 20% of the AUM to meet redemption requirements. As a precautionary measure the AMC approached SEBI for an increase in borrowing limits for certain schemes and SEBI allowed borrowing limits up to 30% of the AUM for Franklin India Low Duration Fund, Franklin India Short Term Income Fund and Franklin India Income Opportunities Fund. While two schemes, Franklin India Short Term Income Plan and Franklin India Income Opportunities Fund have currently availed the borrowing permission granted by SEBI to borrow beyond the 20% limit, the sustained redemption pressure has not abated. Due to this, and due to the inability to liquidate securities in the portfolio in the current market environment, we are of the opinion that it is not prudent for the Schemes to continue to borrow increasing amounts of money for meeting redemption obligations.
Sale of assets: Over the last 6 months, we have been able to manage redemption demands without any distress sale. We have funded this through sale of assets, pre-payments, scheduled maturities and coupons. The schemes could generate cash of approximately INR 29,500 crore from sale of assets. Out of the above INR 29,500 crore, approximately INR 21,320 crore was generated from sale of AA or below rated papers. However, the extended lockdown and resultant systemic illiquidity has resulted in an unprecedented situation. Further, we do not believe that distress sale of portfolio holdings is in the best interest of investors as it causes value destruction.
5. What were the options available under the regulation (besides winding up) and effectiveness of the same to address the current liquidity concerns?
a) Restricting the redemption: We explored the possibility of suspending redemptions until market conditions stabilize without winding up the schemes. However, conditions for such a suspension under the current regulatory framework, such as a maximum suspension period of 10 working days (in 90 days) and the requirement to honour redemptions up to INR 2 lakh per day per investor, rendered this approach unviable to meet the severe and sustained impact of the current crisis.
b) Elongate the redemption payment: We have been making redemption pay-outs on T+1 basis from the date of receipt of redemption application, although regulations allow for a maximum of 10 working days for this purpose. We explored the option of elongating the redemption pay-out cycle by taking the benefit of the maximum period permitted under regulations. However, while this option may be suitable to tide over short-term liquidity issues, it is not adequate to address the severe and sustained impact of the current crisis.
c) Distress sale: We also explored the option of selling the securities at a discount to meet redemption requests. After careful consideration, this option was ruled out as it would have resulted in significant value erosion and placed a disproportionate burden on investors who were continuing to hold their positions in the funds.
6. What about the expenses charged to these funds which are being wound up?
Franklin Templeton will not charge any management fees for the funds that are being wound up. However, expenses as permitted under SEBI regulation 52 will continue to be charged to the funds. These are generally in the nature of audit fees, custody fees, fund running expenses, etc.
7. What are the implications for Franklin Templeton’s business in India?
Long Term Commitment Intact: We remain committed to the India business for the long-term. Franklin Templeton has more than 25 years of history in India, and our commitment to the Indian market and our investors remains steadfast. We also have 33% of our global workforce based in India including our global service entities that represent almost every functional area in Franklin Templeton. We continue to manage an additional 27 open ended schemes, 24 close ended and 6 fund of funds schemes with approximately INR 50,000 Crore of AUM in fixed income, equity, hybrid, overseas, feeder and multi-asset schemes which are not impacted by the winding up process. We continue to manage these schemes in line with their investment mandate with a view to delivering superior investment outcomes for our investors.
Immediate Priority: Our immediate priority is to assist the Trustees in managing the winding up of these funds in the best interests of our investors, and to support our clients and partners during this time. We have always taken all decisions in the best interests of our investors and have tried to keep investor interest paramount in all that we do. This decision, however difficult and challenging, is also taken in order to permit a managed and orderly sale of our portfolio holdings in an extremely challenged market environment due to the Covid-19 pandemic and related lockdown, to prevent the need to make distress sales of portfolio securities at steep discounts which could lead to significant value erosion for investors. We hope that our investors, relying on our long track record, integrity and brand reputation built over many years in India, will agree that this decision, while difficult, was taken in the best interest of our investors.
Franklin Templeton, in India and globally has a strong balance sheet. Our diversified book of assets that we continue to manage, and our strong retail franchise provide us the financial strength to continue investing in our business in India. We will continue to focus on building a strong asset management business in India across Equity, Hybrid. Fixed Income, Overseas and Solutions and Alternate funds. There are no changes planned to our operating model as a result of this decision.
Reassuring Investors in Debt Mutual Funds
– AMFI Advises investors to remain invested in Mutual Funds to create wealth over the long term
Mumbai, April 24, 2020: Following the announcement of winding up of six credit risk fixed income schemes by one of the asset management companies (AMC), Association of Mutual Funds in India (AMFI), the mutual fund industry body, today assured investors that majority of Fixed Income Mutual Funds AUM is invested in superior credit quality securities and schemes have appropriate liquidity to ensure normal operations.
AMFI strongly recommends that investors continue to focus on their investment goals, consult their financial advisor and not get side-tracked by an isolated event in a few schemes of one fund company.
The action taken by the particular AMC is limited to the six specific credit risk fixed income schemes managed by the said AMC due to the illiquidity of their portfolios. The assets under management (AUM) of these six schemes constitute less than 1.4% of the Indian Mutual Fund Industry’s aggregate AUM as on March 31, 2020.
Fixed income schemes of most mutual funds have superior credit quality as confirmed by ratings of independent credit rating agencies and continue to remain fairly liquid even in these challenging times.
SEBI regulations allow mutual funds schemes to borrow up to 20% of their assets to meet liquidity needs for redemption / dividend pay-out. While AMFI is in the process of collecting the data, many Mutual funds have informed that they don’t have any outstanding borrowing.
Liquidity, Maturity profile and Credit quality for Debt Funds is appropriate for day to day operations to continue uninterruptedly.
We expect fixed income funds across entire Mutual Fund Industry to continue their normal operation without any material impact.
Mr. Nilesh Shah, Chairman, AMFI, commented, “Banking liquidity in excess of Rs 700,000 crore, Long Term Repo Operations ( LTRO ) conducted by the RBI , expectations of further rate cuts and Operation Twist by the RBI is likely to keep bond market liquid and normally functioning in current challenging times”.
“The Mutual Fund industry remains fully committed to investor interests and there is no need for them to panic and redeem their investments. The industry continues to remain robust like in 2008 sub-prime crisis or 2013 taper tantrum crisis.” Mr Shah added.
Mr. NS Venkatesh, Chief Executive, AMFI, said: Mr. NS Venkatesh, Chief Executive, AMFI, said “The Mutual Fund industry has seen many cycles and its professional fixed income fund managers have managed crises efficiently over the years. Investors continue to repose trust in the industry and over the last 5 years the Indian MF Industry AAUMs have doubled from Rs. 11.88 lakh crores as on March 31, 2015 to Rs. 24.70 lakh crores of AAUM as on March 31, 2020.”
Most credit risk funds have pretty good credit quality and sufficient liquidity in today’s challenging times and continue to remain an attractive investment option for investors, Mr Venkatesh said.
(a) The below table summarises the amounts receivable on maturity dates or if put option is available then the immediately forthcoming put option date
(b) The percentages have been computed considering the total of all amounts receivable less the outstanding borrowings, as the base
(c) Part payment amounts receivable on pre-agreed dates as per terms of issuance are reflected in the respective buckets per receipt dates
(d) Net Asset Value per unit will continue to be computed and declared as per the same accounting and valuation principles as done prior to April 23, 2020 without any change
(e) For perpetual bonds, the immediately forthcoming call date is considered as the maturity date
(f) For Securities which are fair valued by the AMC, the fair valuation as on April 23, 2020 is considered as the maturity value. Note that, at maturity, the issuer is obligated to pay the face value and accrued coupons/ other accruals, if any as per the terms of the issuance
(g) The data excludes any recovery from segregated portfolios. Receipt of interest and principal repayments from segregated portfolios will accordingly increase payout to investors of the segregated portfolio
(h) Interest income is not considered in the projections. Receipt of coupons will add to the cash flows and accordingly increase payout to investors
(i) On sale of securities in the secondary market, sale value will differ from the maturity value
(j) For securities with interest rate reset at periodical intervals which have a floor and cap rate as per the terms of the issuance, maturity date has been considered for the cash flow projections vis-à-vis the interest reset date which is normally considered in macaulay duration and valuation by the valuation agencies
(k) Securities sold in the secondary market prior to the maturity will accelerate the receipt thereby facilitating payout to investors before scheduled maturity
(l) Prepayments or accelerated payments made by the issuer will prepone the receipt thereby facilitating payout to investors before scheduled maturity
Scheme Codes and Scheme Names
|FIUBF||Franklin India Ultra Short Bond Fund (No. of Segregated Portfolios – 1) – (under winding up)|
|FILDF||Franklin India Low Duration Fund (No. of Segregated Portfolios – 2)- (under winding up)|
|FISTIP||Franklin India Short Term Income Plan (No. of Segregated Portfolios – 3)- (under winding up)|
|FIIOF||Franklin India Income Opportunities Fund (No. of Segregated Portfolios – 2) – (under winding up)|
|FICRF||Franklin India Credit Risk Fund (No. of Segregated Portfolios – 3) – (under winding up)|
|FIDA||Franklin India Dynamic Accrual Fund (No. of Segregated Portfolios – 3) – (under winding up)|
Maturity profile considering put and call option & put option dates – Cumulative
|> 5 years||–||–||100%||100%||100%||100%|
|AUM as on Apr 23, 2020||9,679.26||2,389.07||5,658.22||1,854.61||3,526.55||2,540.56|
|(Amount in INR crores)|
The approximate expected coupon receipts during the period 0 to 1 year is summarised in the below table
Interest income is not considered in the projections above. Receipt of coupons will add to the cash flows and accordingly increase payout to investors
The Annual % is an approximate % expected for the period 0 to 1 year and is subject to change for subsequent years
|Amount in INR crores||800||250||650||230||350||220|
These are projection of cashflows based on current portfolio holdings. Any sale of securities, payments of coupons, prepayment will have a postive impact whereas any credit issue, default or delay in payment will negatively impact the projections
The information contained in this communication is not a complete representation of every material fact and is for informational purposes only. Statements/ opinions/recommendations in this communication which contain words or phrases such as “will”, “expect”, “could”, “believe” and similar expressions or variations of such expressions are “forward – looking statements”. While it will be the endeavour of the Trustees to achieve the best possible outcome for the investors. Actual results may differ materially from those suggested by the forward-looking statements due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risk, general economic and political conditions in India and other countries globally, which have an impact on the service and / or investments. There may have been changes in matters which affect the security subsequent to the date of this communication
|Franklin India Ultra Short Bond Fund (Number of Segregated Portfolios – 1) FIUBF||
|Franklin India Low Duration Fund (Number of Segregated Portfolios – 2) FILDF||
|Franklin India Short Term Income Plan (Number of Segregated Portfolios – 3) FISTIP||
|Franklin India Income Opportunities Fund (Number of Segregated Portfolios – 2) FIIOF||
|Franklin India Credit Risk Fund (Number of Segregated Portfolios – 3) FICRF||
|Franklin India Dynamic Accrual Fund (Number of Segregated Portfolios – 3) FIDA||
All investments in debt funds are subject to various types of risks including credit risk, interest rate risk, liquidity risk etc. Some fixed income schemes may have a higher concentration to securities rated below AA and therefore may be exposed to relatively higher risk of downgrade or default and the associated volatility in prices which could impact NAV of the scheme. Credit rating issued by SEBI registered entities is an opinion of the rating agency and should not be considered as an assurance of repayment by issuer. There is no assurance or guarantee of principal or returns in any of the mutual fund scheme.
Q 1: When can I expect to start receiving monies from the funds?
Ans. Each fund has its own cash flows and borrowings and therefore will be able to return monies at different points of time. Based on our best estimate of cash flows at this time, the schemes are expected to return monies as follows:
|Fund||AUM (INR Cr)||% of Cash flow within 3 months||% of Cash flow within 6 months||% of Cash flow within 1 year||% of Cash flow within 2 year||% Coupon to be received in the first year|
All percentages have been computed considering the total of all amounts receivable less the outstanding borrowings, as the base. The above table factors in only the scheduled maturities (table 1) and approximate estimated coupon payments in the 1st year (table 2). It does not account for any receipts from pre-payments from issuers or cash flows from securities sold in the secondary market once liquidity returns to this section of the market. Factors that could negatively impact cash-flows include credit issues or payment delays faced by any of the investee companies. It will be the endeavor of the schemes to liquidate the portfolio at the earliest possible time, while preserving value for unitholders
Q 2. Why will it take you so long to return the money?
Ans. Before any monies can be returned to unitholders, the borrowing in the fund that was taken in order to fund the heightened levels of redemptions will need to be repaid. Further, due to sustained redemptions, many of the funds were forced to liquidate some of the shorter maturity or more liquid holdings in the portfolio. Both these factors are causing a further delay in how soon we estimate the schemes can return monies to unitholders. As can be seen from the data above, continuing to permit redemptions with high levels of borrowing or selling the shorter maturity or more liquid papers would not have been in the interest of our unitholders. These were also some of the important considerations in making the extremely difficult decision to wind up these funds in order to preserve value for existing unitholders.
While repaying the borrowing does not impact the value of money returned to unitholders, it does delay when we can start to pay out to unitholders.
Q 3: If the Macaulay Duration of Ultra Short Bond Fund is only 4.53 months, why will it take you nearly 2 years to return a substantial percentage of the money in this fund?
Ans. 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. Also, for securities with interest rate reset at periodical intervals which have a floor and cap rate as per the terms of the issuance, the maturity date has been considered for the cash flow projections vis-à-vis the interest reset date which is normally considered in Macaulay duration and valuation by the valuation agencies. Further, this cash flow is after taking into account the fact that initial cash flow received will go towards paying the borrowing in the fund, which delays how soon the schemes can start to return monies to unitholders. 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 unitholders.
Q 4. Why is FISTIP only able to return such a small percentage of the money in 1 year? How long will I have to wait to get all my money?
Ans. The reasons for this as are follows:
These were also some of the considerations and reasons that led us to make the extremely difficult decision to wind up the funds. Continuing to fund redemptions in this manner was not only eroding value for unitholders, but as can be seen from the expected payment schedule, has impacted the time it will take to start returning money to unitholders.
It is 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 unitholders. We will update data on cashflows beyond 2 years periodically for the information of unitholders
Q 5: Why is FIIOF only able to return such a small percentage of the money in 1 year? How long will I have to wait to get all my money?
Ans. The reasons for this as are follows:
These were also some of the considerations and reasons that led us to make the extremely difficult decision to wind up the funds. Continuing to fund redemptions in this manner was not only eroding value for unitholders, but as can be seen from the payment schedule, has impacted the time it will take to start returning money to unitholders.
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 unitholders. We will update data on cashflows beyond 2 years periodically for the information of unitholders
Q 6: What are the next steps for me to get my money? What action do I need to take?
Ans. Unitholders will receive a request to vote electronically on the process of winding up the funds under regulation 41 of SEBI (Mutual Fund) Regulation 1996 to authorize the Trustees, to take steps for winding up of the schemes. Once this vote is complete and results notified, the schemes will be able to start monetizing its assets and distributing the investment proceeds in compliance with SEBI regulations.
Q 7. Why do I see papers with such long maturities across all the funds, including in Ultra Short, Low Duration, etc.?
Ans. The maturity dates listed are the final maturity dates of the papers held in the portfolio, though many of these papers have regular interim cash flows and features such as interest rate resets or call/ put options which significantly reduce the effective maturity and are factored into the calculation of the Macaulay Duration. Many of these papers are also liquid and can be sold in the secondary market during normal market conditions.
It will be our endeavor to liquidate the portfolio at the earliest possible time having regard to market conditions, and without causing value erosion for investors.
Disclaimer: The information contained in this communication is not a complete representation of every material fact and is for informational purposes only. Statements/ opinions/recommendations in this communication which contain words or phrases such as “will”, “expect”, “could”, “believe” and similar expressions or variations of such expressions are “forward – looking statements”. While it will be the endeavour of the Trustees to achieve the best possible outcome for the investors. Actual results may differ materially from those suggested by the forward-looking statements due to risk or uncertainties associated with our expectations with respect to, but not limited to, exposure to market risk, general economic and political conditions in India and other countries globally, which have an impact on the service and / or investments. There may have been changes in matters which affect the security subsequent to the date of this communication.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
1. Emails From Franklin Templeton
2. Press Release from AMFI
(Republished with Amendment)
Republished with Amendments.