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Franklin Templeton Mutual Fund has reduced its Fund Fund (FoF) exposure to debt funds that are liquidated by 50%. A senior AMC executive who declined to be named said this was the decision of an internal review committee. A Fund of Funds (FEF) is a mutual fund that invests in other mutual funds. The executive also added that the underlying debt funds in which these FoFs invest will be readjusted early next week.
The Franklin Templeton Mutual Fund has six of these mutual funds that experienced sharp declines due to their holding of the 6 Franklin debt schemes that are being liquidated. Among the FEFs, the Franklin India Multi Asset Settlement Fund fell 22.41%, the Franklin India Dynamic Asset Allocation Fund fell 16.6% on March 24, according to data from Value Research. The two schemes had 50% and 46% allocations respectively to Franklin’s Short-Term Income Plan, one of 6 debt schemes as of March 31. The lower drop in the Dynamic Allocation Fund suggests that it may have reduced some exposure to the Franklin Short-Term Income Plan.
Franklin Templeton AMC also has four other FoFs that allocate assets between equity and debt based on the age of the client. They are the Franklin Life Stage Fund of Funds of the 20s, 30s, 40s and 50s. Each of them was exposed to the Franklin India Dynamic Accrual Fund, one of the 6 schemes that are being liquidated. Exposure at the end of March was 12.56%, 29%, 38.14%, 52.23%, respectively. The 4 life stage schemes decreased 6.59%, 13.51%, 17.81% and 29.71%, respectively. Since asset allocation funds have both equity and debt, some of their NAV changes occur due to capital movements as well. However, the vast majority of the NAV changes mentioned above were due to downgrades.
In the life stage funds, more money was placed in the older tranches because debt is normally considered less risky than equity. Investors should exit these FoFs. This is a panic situation in the market and redemptions in these mutual funds from other investors could further increase your risk. Also, you don’t know how much of the portfolio will be predetermined. Therefore, my recommendation is to go out, “said Viral Bhatt, a Mumbai-based mutual fund distributor.
A recovery in the holdings of Franklin’s 6 debt schemes will help investors in FOFs to recover their losses as well. Therefore, the trade-off for investors in these schemes is whether they should take the current loss and exit or stay in the hope of recovery, but also at the risk of further redemptions.
Investors should make a decision on these FdFs after considering their risk appetite and financial goals. Staying on them can expose them to additional losses, while an output will crystallize the drops of NAV.
