The confidence of many investors got jolted when over Rs 30,000 core of their money invested in trusted debt funds of reputed mutual fund (MF) company Franklin Templeton got stuck indefinitely after the world’s leading fund house on April 23, 2020 announced that it will close six of its debt mutual funds schemes. As such funds are less riskier than the equity funds, people often park their short-term money and even emergency funds in debt MF.
Although several bond MF schemes suffered some problems last year due to bond failures may companies starting with the IL&FS fiasco resulting in part payment to investors due to side pocketing measures adopted by the Asset Management Companies (AMCs), Franklin Templeton was the first AMC to completely freeze as many as six funds – viz. Franklin Ultra Short Bond Fund, Franklin India Low Duration Fund, Franklin India Short Term Income PLan, Franklin India Dynamic Accrual Fund, Franklin Income Opportunities Fund and Franklin India Credit Risk Fund.
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Depending on the maturity period of underlying securities in the portfolio of the six debt funds, it would take more than five years to return the entire investment made in four of the six funds while for the investors of the other two the timeline could be less than five years, Franklin Templeton said in the email.
But even after waiting till the maturity period, there is a risk that the investors may not get back their entire money as issuers of some defaulted debt instruments may not be able to pay back the investors.
However, a June 24, 2020 circular by Securities and Exchange Board of India (SEBI) provides a ray of hope to investors as the market regulator has released an operational framework for transactions in defaulted debt securities post maturity date/ redemption date.
So, in case an issuer of a defaulted debt instrument fails to pay back on maturity, the investors will have an option to sell the securities in the market to recover money, which may brighten the prospect of the investor of the frozen debt schemes.