If you are an investor in the Franklin India Ultra Short Bond Fund, here is an update from the fund house you should note.
This is to inform you that in accordance with SEBI regulation on creation of segregated portfolios (side pocketing), we have received Board of Trustees approval to create a segregated portfolio in respect of securities issued by VODAFONE IDEA LTD in Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund with effect from January 24 2020, due to a rating downgrade of certain securities issued by Vodafone Idea Ltd to CRISIL BB (Rating watch with negative implications) i.e. below investment grade by CRISIL.
All investors who were existing in the fund as on the date of the rating downgrade (credit event) will receive units in the segregated portfolio.
Creation of the segregated portfolio has no further impact on the NAV of the funds beyond the fair valuation of these securities done on January 16, 2020. Kindly note that this fair valuation only reflects the realizable price of the relevant securities on the date of valuation and does not indicate any reduction or write-off of the amount repayable by Vodafone Idea Limited.
Additionally, investors will receive an account statement (within five business days) showing the value of the main portfolio and segregated portfolio. The segregated portfolio will be listed on a stock exchange within ten business days. Any payment received from VODAFONE IDEA LTD will be promptly paid to the investors holding units in the segregated portfolio.
As you are aware, the NAV of Franklin India Ultra Short Bond Fund dropped by about 4.2% on Jan 16, 2020.
In Nov, 2019, Supreme Court asked telecom companies to pay additional levy, which would deeply hurt the already stressed financial situation of these companies. The companies went to Supreme court against this. Yesterday, the Court denied any relief.
Franklin India Ultra Short Bond Fund recognised this event, marked the holding as junk and completely writing the value from the books. This was done to prevent a run on the fund by existing investors as well as exploitation of the event by new investors.
Now, since the bond has been officially rated below investment grade, it has been moved to a sidepocket, where it will await a future recovery. The next payment event is in June 2020.
Welcome to the world of credit risk!
If you are invested in the fund, here is a checklist to refer to:
- You don’t need the money in the next couple of years.
- You understand that this is the nature of the fund. It takes credit calls based on business models and financial situations and wraps it holdings in a structure to ensure the investment is recovered. But it cannot be immune, like what has happened now.
If you are saying yes to the above, stick around and let the fund managers do their work.
While many investors believe they can take risk for the sake of additional returns, they don’t realise it until they see risk in action. If you are feeling a churn in your stomach after seeing the fall in NAV, may be you should never have invested in this fund.
Don’t sell / exit in panic.