The DEAD Fund
Sometimes people invest their money in quite risky securities as they are influenced by the greed of high returns. But, in most of the cases they end up losing instead of gaining. Probably something similar is happening with investors who park their money with debt funds. Franklin Templeton India has wound up 6 of its debt funds and the amount at stake is close to 26000 crores!
Uggh what is all these funds,bonds,debt mutual funds etc So much complex to understand right? Let's break everything up!!!
The Mutual Fund industry operates on a simple premise. They will tell you regular investors have little know-how about the complexities inherent in stock markets. They’ll convince you that you’ll always be at a disadvantage since you don’t have access to information that could help you optimise your choices. A better approach is to simply let them manage it for you.
They’ll take your money, divert it to a common pool — with funds mobilized from other investors like you and they’ll invest this corpus in handpicked stocks to offer you oversized returns.
So mutual funds basically invests in stock market and corporates so risk associated with them also passes on to the investor who had given those monies to mutual funds institutions. The ups and downs can be too much. It’s never a good feeling to hear that your fund is down 10% because the stock markets continue to tumble. So for the faint-hearted, they offer another alternative — a debt mutual fund (Superman the saviour).
Unlike equity mutual funds, where the fund house is exposed to the swings of the market, debt mutual funds offer more consistent returns. In a debt mutual fund they’ll use your money to lend to corporates and governments, instead of buying stocks from select companies. In return, the corporate will promise to pay the fund house the entire principal (within a specified time frame) and a fixed sum on top. The contract agreement is called a bond. The time frame — Maturity Period. And the fixed return on top is called the yield. once a fund house invests in a bond, the corporate is liable to pay back the principal and the yield. So basically it's a kind of secured investment.
Many investors usually base their decisions on returns and tend to ignore the risk. If we analyze the scenario in case of Franklin Templeton India, their debt funds were the category leaders (offered maximum returns) and hence this fiasco was coming, based on the unusual market conditions at present. With a greater return comes greater risk and investors need to be smart enough to calculate the risk factor before putting their capital at stake.
Franklin Templeton has always had a reputation for being one of the best in the business — especially with Debt Mutual Funds. The Covid-19 pandemic that has wreaked havoc in Indian bond market over the past two months has led to the fund house closing six of its debt funds with total assets under management of Rs 26000crore.
What this necessarily implies for investors is that there will no purchases and redemptions made in these funds post-cut-off time. reduced liquidity in the Indian bond markets for most debt securities and unprecedented levels of redemptions following the COVID-19 outbreak and lockdown has led the fund house to wind up six of its debt funds. These debt funds have a high exposure to low rated debt securities that have been the most impacted by the ongoing turmoil in the bond market.
In nutshell these debt funds have high exposure to low rated bonds, where liquidity is a big issue. Hence huge redemptions leading to the fund selling the bonds at very low prices, would have eroded the underlying value of the funds’ portfolios. By winding up these funds, Franklin Mutual states that it has sought to protect the value of investors. Essentially the idea to wind up the funds and stop redemptions is to prevent further value destruction in these funds on account of selling the bonds in the portfolio at very low prices. As the bond market comes back to normalcy and the appetite returns, the fund could look to sell the assets at a reasonable value.
Uggh what is all these funds,bonds,debt mutual funds etc So much complex to understand right? Let's break everything up!!!
The Mutual Fund industry operates on a simple premise. They will tell you regular investors have little know-how about the complexities inherent in stock markets. They’ll convince you that you’ll always be at a disadvantage since you don’t have access to information that could help you optimise your choices. A better approach is to simply let them manage it for you.
They’ll take your money, divert it to a common pool — with funds mobilized from other investors like you and they’ll invest this corpus in handpicked stocks to offer you oversized returns.
So mutual funds basically invests in stock market and corporates so risk associated with them also passes on to the investor who had given those monies to mutual funds institutions. The ups and downs can be too much. It’s never a good feeling to hear that your fund is down 10% because the stock markets continue to tumble. So for the faint-hearted, they offer another alternative — a debt mutual fund (Superman the saviour).
Unlike equity mutual funds, where the fund house is exposed to the swings of the market, debt mutual funds offer more consistent returns. In a debt mutual fund they’ll use your money to lend to corporates and governments, instead of buying stocks from select companies. In return, the corporate will promise to pay the fund house the entire principal (within a specified time frame) and a fixed sum on top. The contract agreement is called a bond. The time frame — Maturity Period. And the fixed return on top is called the yield. once a fund house invests in a bond, the corporate is liable to pay back the principal and the yield. So basically it's a kind of secured investment.
Many investors usually base their decisions on returns and tend to ignore the risk. If we analyze the scenario in case of Franklin Templeton India, their debt funds were the category leaders (offered maximum returns) and hence this fiasco was coming, based on the unusual market conditions at present. With a greater return comes greater risk and investors need to be smart enough to calculate the risk factor before putting their capital at stake.
Franklin Templeton has always had a reputation for being one of the best in the business — especially with Debt Mutual Funds. The Covid-19 pandemic that has wreaked havoc in Indian bond market over the past two months has led to the fund house closing six of its debt funds with total assets under management of Rs 26000crore.
What this necessarily implies for investors is that there will no purchases and redemptions made in these funds post-cut-off time. reduced liquidity in the Indian bond markets for most debt securities and unprecedented levels of redemptions following the COVID-19 outbreak and lockdown has led the fund house to wind up six of its debt funds. These debt funds have a high exposure to low rated debt securities that have been the most impacted by the ongoing turmoil in the bond market.
In nutshell these debt funds have high exposure to low rated bonds, where liquidity is a big issue. Hence huge redemptions leading to the fund selling the bonds at very low prices, would have eroded the underlying value of the funds’ portfolios. By winding up these funds, Franklin Mutual states that it has sought to protect the value of investors. Essentially the idea to wind up the funds and stop redemptions is to prevent further value destruction in these funds on account of selling the bonds in the portfolio at very low prices. As the bond market comes back to normalcy and the appetite returns, the fund could look to sell the assets at a reasonable value.
Good Article! keep it up Aman! best wishes.
ReplyDelete