Mutual Fund

All is not lost in your Franklin schemes!

“A failure is not always a mistake, it may simply be the best one can do under the circumstances. The real mistake is to stop trying.” – B. F. Skinner

All of us are raise with the expectation that you need to be the best and failures are wrong. When One fails in his/her attempt, very rarely S/he admits that they were wrong. We are tune to find the blame on an external factor; when we slip, it is always a fault of either our footwear or the floor but never ours. It pains me to see people apply the same mentality to thier personal finances. The last 12-18 months have not been easy for an investor due to series of events ranging from defaults on their debt investments, banks getting closed, markets falling by 20-25% in few weeks. This reminds me of the proverb “When it rains, it pours.” though rarely people use the full statement which should be “When it rains, it pours but soon the Sun shines again.”

Eight months back in Nov 2019, I flagged that due to the ongoing scenario, the risk of default in the debt fund holding of Vodafone has increased. (Vodafone Idea exposure, What should you do?) One should size their exposure to such investments. I personally had the 30-35% of my portfolio invested in one fund, which had vodafone exposure and I cut down the exposure by more than half as per my risk appetite. Three months later, rating agencies have downgraded the bonds of Vodafone and the exposure in the fund was written off.

Two months back in Apr 2020, I wrote that the liquidity conditions of the fund were deteriorating pretty fast as well as its credit profile. Investors should review their holdings and exit accordingly. (Franklin India Ultra Short Bond Fund: Is it time to exit?) Within few weeks, the AMC decided to wind up the scheme and almost USD 3.5bn invested amount of investors were locked in such schemes. There is going to be a resolution and the money is locked in not lost. How long it stays locked in will be anyone’s guess. These are situations, which can leave a scar in the investors mind for a long time.

Thankfully, a positive news hit this week that the funds have received the coupon payment on the bond investments of Vodafone Idea on June 12, 2020. Though people were not sure how to know the amount they will recieve. Here are the steps to calculate the payout you should expect.

Step 1: Check the segregated portfolio you are holding to find out the number of units you hold in that segregated portfolio. for e.g. Anand holds 50,000 units in the segregated portfolio

Step 2: Find out the NAV of these units. This NAV has been sent by the AMC over an email according to the plan you were invested in (Direct or Regular/ Dividend or Growth etc). A table like below:

Plan Partial payment price per unit (INR)
 Retail Plan Daily Dividend Option 0.5078
 Retail Plan Weekly Dividend Option 0.512
 Institutional Plan Growth Option 1.3797
 Institutional Plan Daily Dividend Option 0.5053
 Super Institutional Plan Growth Option 1.4251
 Super Institutional Plan Daily Dividend Option 0.5094
 Super Institutional Plan Weekly Dividend Option 0.5105
 Direct Super Institutional Plan Growth Option 1.4325
 Direct Super Institutional Plan Daily Dividend Option 0.5084
 Direct Super Institutional Plan Weekly Dividend Option 0.5103

Step 3: The coupaon paid is what % of the overall dues expected on the bond. This is also highlighed in the email. For e.g. 7.58% for the Frankling india Ultra Short Bond Fund.

Amount expected to come back on back of Segregated portfolio = No of Units x Price per unit x % of accrued payment received. In our example of say Direct Super Institutional Plan, Amount  due will be equal to  50000 x 1.4325 *7.58% = 5,429/-. If the full amount is received by the AMC then we can expect the remaining (1-7.58%) portion (~66,000) to be paid out as well.

If you are the one, receiving such amount. Count yourself lucky and do not expect to repeat such good outcomes on future investments. Prudent investing says, you need to be nimble footed on your investments. Always keep an eye on your investments, review it regularly and take corrective actions. In the current scenario, If you want to just buy & hold then you are mistaken because there are no investments without any risk. If you think that there are no risks, It only means that you can not see it or understand it. This payout will also be taxable, so make sure you understand about how this needs to be shown in your tax filing. Enjoy this small payout as a gift and Keep investing!

 

 

Mutual Fund

Franklin India Ultra Short Bond Fund: Is it time to exit?

“You either die hero or live long enough to see yourself become the villain.”  –  from The Dark Knight

Franklin India Ultra Short Bond fund was launched in Dec 2007 and has a history of 12+ years with return since launch of 8.57%. In the current mayhem in the markets and the series of credit risks events, people have been losing their confidence on the debt funds. I have been personally invested heavily in the bond funds, and FI-USB has been one of the few funds in my portfolio with significant exposure. In the last 7 years of investing in the fund and keeping 8.9%+ return is a pleasing experience, this is partially due to timely reducing exposure by half, before the Vodafone-Idea side pocketing (hit of ~4.4%). Lot of people are invested in this fund and in the recent month, it have given -ve return on 9 out of 20 days. It has obviously caused the concern in investors and they worry about any other credit event. Let’s try to analyse this fund with its historical/ current data to take our call instead of relying solely on emotional response. (Why not emotional response?)

Historical Return Profile

In the last 12+ years history, the fund has given 8.57% of CAGR. I looked at the 3 yr rolling return for various periods as below. The worst return scenario has been 6.94% annual return for 3 yrs (Mar 2017 to Mar 2020) and best has been 10.1% return (Nov 2011 to Nov 2014). The mean as well as median return for this fund has been 8.9%, which is nothing but phenomenal.

FIUSB 3yr RR

Yield to Maturity (YTM)

I have explained in earlier write-ups, why YTM is more important then the historical returns profile (Historical vs Future Returns). The yield to maturity reflects the expected return generated from the current bond investments by the fund over the duration of investments in case of no credit risk event (defaults). The current YTM of the fund is 9.48% for a duration of 0.62 years, this is pretty attractive return from the bond fund.

If you have been a regular reader of my articles, by now you would have realized that I am more concerned about the risk i am taking in my portfolio vs the return I am generating. So let us analyse the risk profile of the fund to make the complete assessment.

Credit risk

This fund has always been more risky then it’s counter-part just by the virtue of taking more credit risk. To understand this in more details, Let’s understand the riskiness of bonds in terms of ratings. As a short term debt fund, our benchmark is Govt Treasury bills which are theoretically risk free. In increasing level of risk below should be the sequence: Sov -> AAA/ A1 -> AA/ A2 -> A/ A3 -> BBB/ A4 -> C or D.

The fund has no exposure/ investments in the Sov and <2% exposure in AAA/ A1 instruments. Majority of the investments are in AA rated bonds ~84% and 22% in A & below rated bonds. Therefore from the fund definitely has a higher credit risk. Most of the bonds are from the NBFCs, which seems more vulnerable in current scenario of lock-down in my non-expert opinion.

Another way to mitigate this risk is to diversify and have lower exposure to a single company or bond. It currently holds 88 different bonds but Top 10 holdings make ~40% and biggest exposure being >7%. if any of these defaults, it will be a big dent again.

Liquidity Risk

What is Liquidity risk? Liquidity is a measure to understand the ability to translate the investments into cash by selling, for e.g. If you have a residential apartment worth 70lakhs, and you have to sell it to generate cash within 10-15 days there is a very high chance you will end up realizing <70lakhs even if you are able to sell it. That is because of lower liquidity of the real-estate market.

Why it is important? The fund has seen the pressure of accelerated redemption over the last 6 months. it has lost half of its AUM from 20,130 Cr in Sep 2019 to 10,964 Cr in Mar 2020. Losing roughly 1,500 Cr every month.

This has taken the toll on the fund as it has to liquidate its more liquid and safe investments in AAA/A1 category. In Sep 2019, it had 27%+ investment in AAA/A1 to <2% in Mar 2020. It means if the fund continue to face the similar level of redemption, it will have to liquidate the AA category bonds, which will be loss making trades in general. The fund is already having -7% cash/ call money investment, which means it had to take a loan/ overdraft to meet the redemption pressure. It is also important to note that fund has ~30% investment in the bonds maturing in 2022 or afterwards. 

Re-Investment Risk 

If my investment horizon is 3 years and the fund duration is 0.62 years, It means that the funds investment will mature and need to be re-invested. As we seen the RBI has lowered the interest rates, the new investments bonds will also be yielding lower returns if the credit risk is same. This means that the YTM of 9.48% is not sustainable and will move lower.

Interest Rate Risk

This i have covered earlier but in summary if the duration of the fund is higher then the increase in interest rate will be negative for fund profile and vice-versa. Since the Modified duration/ duration is <1yrs, the fund has a lower interest rate sensitivity though higher vs peers in same category.

In Summary, The fund has an attractive return profile but the risk levels are definitely higher.

  1. If you have a higher risk appetite and the investment in this fund is not your emergency corpus or for short term goals, you can stay invested in the same. Please be vigilant on the redemption pressure, if that continues for few more months, it will be unsustainable.
  2. If you have invested for short duration, and your goals are due in next 3 yrs or this is your emergency corpus, it will be more prudent to sell and get out of this fund.
  3. If you have not invested but are thinking to invest in this fund, please re-evaluate your decision. You can read about how to build your debt fund portfolio for more details.

In my humble opinion in current scenario, for additional 1% to 2% returns the risk exposure is not justified. One should size their exposure in this fund accordingly. It’s always better to be safe than sorry, Let me know your assessment.

Happy Investing!