Are Mutual Funds Safe in 2020? - Lessons from Franklin Templeton Crisis - YouTube

Namaskar! My name is Mukul and very welcome to Asset Yogi.

Friends, for some time, mutual funds are being promoted a lot as an investment.

You'd have definitely heard the 'Mutual Funds Sahi Hai' campaign.

A lot of people are investing too in mutual funds.

and why not? It's a good investment option.

But recently Franklin Templeton closed their 6 investment schemes.

Because of this, mutual funds investors are very scared,

and not only from Franklin Templeton,

but from a lot of other mutual fund schemes also, people are withdrawing their money.

And because of this situation, various questions are coming into people's minds.

Like, what happened in Franklin Templeton, that they had to close the mutual find scheme?

Was there no option, that even if people were doing redemption,

In cash position, whichever cash position mutual fund maintains,

people would be given money from that.

The second question comes, is this problem limited to Franklin Templeton schemes?

Or can it go to other mutual fund schemes?

If for any reason, a mutual fund is closed,

what happens to our investment? Is it safe?

Or does all of our money get drowned?

Overall there is another question in our minds that,

are mutual finds safe as an investment?

Should we invest in mutual funds at the present time?

Keep it there? Or take it out from there?

It's possible that some of these questions are in your mind,

So I'll try to answer all these questions in this video.

And this video is not limited to only the Franklin Templeton crisis, but

how to analyze mutual funds properly?

I'll try to cover all these things in the video. So stay tuned.

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Friends before starting the video, let me tell you that we have playlists on youtube,

In which one is on Mutual Funds series,

We've discussed all the concepts in detail there. So you can watch it.

If you want to invest in the stock market directly, then

for that, we have master investor series. Do watch it.

We've cleared the concept in every detail there.

Let's quickly get back to our topic.

Let's try to understand the issue of Franklin Templeton.

Let's talk about the company Franklin Templeton India, what kind of company is it?

So it's not a small company that wants to run away overnight after taking your money.

Franklin Templeton Investments is a very famous and big company of the US.

It comes in big investment companies.

It is a US-based company.

In India, it operates in the name of Franklin Templeton India,

as an asset management company.

They operate various kinds of mutual funds schemes.

They run both equity and debt mutual funds schemes.

Their total asset management in India is around 116000 crores,

which is not a small amount by any means.

The figure I'm telling is as of 31st March 2020.

And the closed schemes, what kind of schemes were they?

They were debt schemes.

That means the company used to take money from you

and invested it in corporate bonds or commercial papers.

The company they are buying bonds from is taking the money as a loan

and in return, it'll give fixed returns to the mutual funds.

Now the mutual funds get the returns, so

they pass it on to investors as it is after deducting the management fee.

So the model is very simple. Every debt fund operates like this.

But,

what kind of debt mutual funds were they? I'll quickly tell you the names.

The first scheme was Franklin India Low Duration Fund,

second, Franklin India Dynamic Accrual Fund,

third, Franklin India Credit Risk Fund,

fourth, Franklin India Short Term Income Plan,

fifth, Franklin India Ultra Short Bond Fund,

and sixth, Franklin India Income Opportunities Fund.

So whatever debt schemes were there,

their mandate was that whatever bonds from AAA

to single-A are there, they will invest in them.

See, the AAA rating is the highest rating

meaning when good and sound companies issue the bonds,

so their bonds get the highest AAA rating.

As the rating goes down, it means the risk starts to come in them.

So if there is a risk in a company, then its rating gets a bit lower.

So their range was a bit bigger. So all these debt funds,

they invested in higher-risk bonds.

It's not a risk that an investor doesn't know when investing.

Obviously, it's a very simple rule that when we take a big risk, then we get big returns.

So most investors were going behind bigger returns,

and they knew that they are taking some risk, because

the companies they're investing in, their rating is a bit low.

And if we talk about total six schemes, their total asset under management is 26000 crores.

So actually where did the problem start?

Investors know that it's a risky bond,

or we're investing in risky schemes and we'll get better returns.

But sometimes the risk actualizes, and now that risk actualized.

Cause of Corona and Lockdown the economic standstill came.

Here a lot of investors have a lot of cash requirements,

that's why they started to redeem.

Second, cause investors knew they were investing in risky bonds,

so to reduce the risk, a lot of investors

started to take out the money.

So it became a double-fold problem.

Here the pressure of redemption started to get on Franklin Templeton,

Obviously, every mutual fund maintains a cash position,

These regular redemptions keep happening,

to fund them, every mutual fund maintains a cash position.

But the redemption and applications were so many that,

the pressure built up and the cash wasn't enough.

So the question comes that did Franklin Templeton have only this option,

that they closed the whole scheme, they thought of winding up.

Did they have any other options?

Let's quickly discuss what option did they have?

The first option was the redemption suspension.

The regulation says that every 90 days, means every mutual fund

within 90 days, for 10 days, can suspend the redemptions.

but maybe even these 10 days weren't enough

The kind of pressure they were experiencing, Franklin Templeton thought that this won't be enough.

The second option was there, it's also a short-term measure.

If you redeem a mutual fund, then you get the money in your account the next day,

means the day you did the transaction, which we call T,

you get money on T+1 day.

But according to the regulations, it can be delayed till T+10,

here they get 10 days buffer, but

this too was a short-term measure.

Whatever interviews I heard about Franklin Templeton

I got the idea that the pressure of redemption was too much for these short-term measures.

What was the third option? Loans against securities.

If Franklin Templeton feels that it's a short term problem then,

it can go to the bank and take a loan against securities.

So definitely Franklin Templeton took this option in some mutual funds schemes.

Loans were raised and some redemptions were given from it.

But again it comes that the redemption pressure was too much.

How many loans will they take? and How much maximum loan can it take?

A mutual fund can put up to 20% of assets under management as collateral

in the bank which it can use to raise loans.

But if the redemptions are more than 20%, then this option is closed too.

The fourth option they had was the Distress Sale Of Assets.

means, these bonds will be sold in a secondary market.

Some buyers should be found and sell the bonds at a lower price to them.

So whatever money comes, it can be used in redemptions.

But a risk comes here that, people who took out money before

they took it at a better rate, but people who stayed in the scheme

they will be at a loss because they'll get lower returns.

because these bonds are being sold cheaply.

So Franklin Templeton didn't want to take this option because

the investors' returns would be lowered here and they'd get less value.

The fifth and last option they had, was to wind up. Means the option they took,

which means they closed the schemes.

Now only in closing the schemes, we get the only option

when the redemptions end.

So investors can't redeem now and

can't invest in those 6 schemes. Both are closed.

So the Franklin Templeton gave their views, they said that they took the wide up option because

we want the value to not decrease for investors.

Whatever options we have, we'll avail them.

Now understand one thing that winding up is not write off,

that your money got drowned.

Your money is still invested in those companies' bonds.

Your money will drown in the case when the company gets closed.

Whatever minimal loss you have after curtailing that

the money left, you'll get all of that.

So because of that government has intervened.

RBI has given a special liquidity facility of 50000 crore Rs.

which is a kind of line of credit, which means

If a mutual fund is in a distress situation, then it can go to banks, and then those banks further

borrow this 50000 from RBI

and further, lend it to this mutual fund.

This is also a kind of loan facility.

This kind of facility was given in the crisis of 2008 too.

But most mutual funds didn't use it. The whole industry came out of it.

But definitely, if a mutual fund feels it's a crisis situation

it can definitely use this facility.

But the biggest benefit of this facility is a confidence booster.

That means RBI is there for investors' protection, cause of that

investors get confidence that their money won't get drowned.

But now the question arises that the existing investors

What will happen to them? How will they get back their money?

See, in whatever companies' bonds mutual fund has invested

those bonds will mature at some point.

Let's say some of the bonds mature in 1 or 2 years,

so as the money comes from them, money will be distributed to investors.

One option is this.

The second option we had discussed before, which we call distress sale of assets.

The company or mutual fund can sell these bonds or securities in the secondary market too,

and the money from it can be distributed among distributors.

Now at which option does Franklin Templeton want to go,

for this, they have to do a poll for all the unitholders.

So a poll will be done and the decision will be taken democratically in a way.

So here we covered the issue of Franklin Templeton in detail.

Now let's come to the broad question, are mutual funds safe?

See, in any investment, there is always some inherent risk.

Each investment has a particular risk.

We've in fact covered a lot of investment in the channel, you can watch those videos.

We analyze each investment on 4 parameters there,

Time period, Liquidity, Risks, and Returns.

These 4 parameters you should analyze for each investment.

Even fixed deposits have some sort of risks.

The first risk is obviously that its return gets low and second

banks give insurance of only 5 lakh on all of your investments.

We won't talk about other investments in this video, but I only want to tell you that

every investment always has a risk

In fact, in mutual funds advertisement, you'd have heard 'mutual funds are subject to market risks

please read the offer document carefully.'

The word 'market risk' is highlighted, but it's now shown very highlighted.

But it's important to know the market risk,

this risk is of the market actually.

The economic downturn problem and the situation of lockdown

it's not affecting only mutual funds, every business

even a job person, it's affecting them.

So a bit of risk is everywhere.

So similarly there is risk in mutual funds.

But what can we do? We can take calculated risks

or we minimize our risk. How can we do that?

We can increase our analysis.

How do we have to do that? let's come to our last question,

means do we invest in mutual funds or not? Or do we take out whatever investment we have?

So as I said before, I'll continue my answer from that.

Risk analysis is very important for us.

First understand this, if we're investing money in equity mutual funds and

debt mutual funds. So both have different risks.

In the equity mutual funds, the risk is return-related.

means, in a bad market your returns will be lowered.

You can take out money if you want, even if you take it at a loss.

Or you take out the money at low returns.

On the other hand, in debt mutual funds, returns get lowered but

if the market is bad then liquidity risk gets quite high.

This means even if we want to take out money, we can not.

If a situation arises like in Franklin Templeton's case.

So keep this fact in mind clearly,

see, when you invest in debt mutual funds,

The first concern you have is obviously safety and risk.

So your aim should be to invest in a scheme

which invest in good bonds. So mainly your aim

should not be of high returns in debt schemes.

Your aim should be of getting 1-2% more returns than FD.

So you should not treat debt mutual fund as equity mutual fund,

because in equity mutual funds, we definitely see which fund is giving more returns.

But in debt mutual funds, don't see which mutual fund is giving more returns.

But see which mutual fund is investing in better bonds.

And finally, should we continue our investment?

Should we take out our money? So there is a simple answer to that.

that it depends on your situation.

If you feel that risk is high in your job or business,

then definitely you should maintain some cash position.

Even if you have to sell a mutual fund,

If your cash position is maintained because of that, then you can definitely do that.

That's why you should always make an emergency fund.

Make an emergency fund of 6-12 months.

Once you've made the emergency fund, then if you have surplus money, then definitely invest it.

If you have any running systematic investment plan or SIP

so you can definitely continue that.

I hope you enjoyed this analysis,

we definitely discussed the issue of Franklin Templeton

and this kind of issue can come in any other mutual funds too.

So surely do your analysis.

If you enjoyed this video then do like and share it with your friends and family members.

It's possible they invest in mutual funds.

They might get answers to their questions from this video.

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Till then keep learning, keep earning, and as always, be happy.