Decoding the current debt market scenario

Yesterday was another scary day with news of Franklin Templeton winding up six of their debt funds. FT has been an iconic mutual fund brand with more than 25 years franchise in India. Their debt funds have consistently delivered high returns to investors for a long time. Undoubtedly such news is disturbing. 

I'd like to list out some positives that has come out of this incident

1. By winding up the scheme, FT has protected their existing investors . The rule of investing is that an existing investor should be rewarded for the extra risk they are taking (in staying invested). Unfortunately, the investor in these schemes were staring at reduced returns because the only options for FT was to either keep selling the securities in the portfolio at distress rates or borrow at a higher cost. Now the investor is likely to get the invested amount back as the securities mature or at least a large part of it, if FT sells the security.

2. There is an ongoing debate if RBI has taken enough fiscal measures to overcome the financial stress in the economy. In any case, this event will cause them to take greater measures. It will also help protect debt funds in other AMCs if there is high liquidation pressure

As an investor, what you can do at this point of time is

1. Stay away from credit risk funds (unless you have a high risk appetite and a horizon of 5 years and above). Credit risk funds are debt mutual funds that invest at least 65 per cent of their portfolio in lower than AA-rated papers.

2. Study the portfolio of the fund you have already invested in / are going to invest in. The fund sheet or moneycontrol.com will give you the details of the underlying securities with their ratings. You can add up the percentage exposure of the fund to AAA securities, AA securities, holding in cash etc.

3. Track the corpus or AUM (assets under management) of the fund. The AMFI website gives you the data on a daily basis (check it here). If there is a huge run-off in the fund, this is the best way to find out. You may want to keep a certain limit as the point of exit.

Example - I had clients invest in FT low duration funds and short term income plan. After the Voda downgrade, I started tracking the AUM of the debt funds my clients had invested in. I set the first red flag at 20% run-off and exit at 25% run-off. So I was able to get my clients to exit the Franklin funds in December even before the segregation happened. 

I use this simple tracking format which I normally update every week. I've set the 23rd Aug AUM as the base and then I calculate the run-off against that. In the data shown here (fund name masked), the fund was on a growth path till the heavy sell-off happened across all funds in Mar end. The fund is now recovering.

4. Set a Google alert for the fund, you won't miss out on any related news 

In conclusion, I want to say that the mutual fund industry is extremely transparent and responsive. The risk parameters are clearly defined and available for all investors. However, most investors look at the returns and rush to invest in good times. As an investor, it is important for you to understand your own risk profile, allocate your investment in appropriate funds and monitor it periodically. You will get the rewards in line with the risks you are willing to take. Do reach out to me at [email protected] / +91 9900335853 if you would like to discuss some of the points further.

p.s. - For Franklin investors, the portfolio details with maturity dates of the securities in the affected funds are available so please contact your advisor or the support centre.