As part of SEBI’s reclassification mandate, Franklin Templeton Mutual Fund has made major changes to the three schemes highlighted below (while the rest have been minor). Investors in these schemes will find themselves part of something quite different if they continue. However, they have until 1st June 2018 to exit without paying exit load in these schemes. The new changes will take effect from 4th June 2018.
Please note that exit can have tax implications as high as 30% if that is your marginal tax slab. Debt mutual funds attract short-term capital gains at slab rate for holding periods less than three years. In case of holding periods greater than three years, the tax rate is 20% with indexation.
Franklin India Cash Management Account (AUM: Rs 202 crore)
This scheme will become Franklin India Floating Rate Fund. It is currently mandated to hold 65-100% of its assets in money market instruments, cash and deposits, making it a liquid fund, essentially. This will shift to 65-100% in floating rate paper. Floating rate debt is debt whose interest rates are tied to the overall interest rates in the economy. The remaining 0-35% can go into money market instruments and other types of debt.
This is clearly a drastic shift in the nature of the fund. Floating rate paper is fundamentally different from short-term fixed rate money market instruments, cash and deposits. If you need any confirmation of this, look at the fund’s own Riskometer. The dial has shifted from low risk to moderate risk, skipping the category of moderately low risk – which implies a large swing towards riskier securities.
Franklin India Savings Plus Fund (AUM: Rs 463 crore)
This fund will become Franklin India Savings Fund. It is currently mandated to invest 65-100% of its assets in floating rate debt. Floating rate debt is debt whose interest rates are tied to the overall interest rates in the economy. The balance 0-35% can be invested in money market instruments and non-money market instruments such as bonds and debentures of maturity over 182 days. This will change to 0-100% in just money market instruments. This may imply a dramatic shift in the fund’s portfolio and a narrowing of investment avenues.
Franklin India Income Opportunities Fund (AUM: Rs 3,466 crore)
This fund will retain the same name and will be allowed to invest in the same broad range of debt instruments including government securities, money market instruments, securitised debt, PSU debt and corporate debt. However, the fund will be mandated to maintain a Macaulay Duration of 3-4 years.
The new mandate gives the fund manager some leeway by stating, “The fund manager, in the interest of investors, may reduce the portfolio duration up to 1 year, in case he has a view on interest rate movements in light of anticipated adverse situation. Portfolio Macaulay duration under anticipated adverse situation shall be 1 year to 4 years.”
The fund currently has a modified duration of 1.8 which converts to a Macaulay Duration of 1.97. Hence the fund manager has two choices after the change of mandate, either drastically reduce the maturity of the fund’s holdings or declare an ‘adverse situation of interest rate movements’ (a state of emergency, if you will) and continue with the current maturity profile.