Mutual Funds
This article analyses the portfolio of the Franklin India Ultra Short Duration Fund to see if there any potential red flags similar to what led to the closure of six Franklin debt funds in April 2020.
Franklin India Ultra Short Duration Fund is an Ultra Short Duration Fund re-launched by Franklin Templeton AMC, available for investment since 30th August 2024. This fund, whose New Fund Offering (NFO) concluded on 28th August 2024, marks Franklin Templeton’s return to certain segments of debt mutual funds, from which it had been absent since April 2020.
We covered the launch of Franklin India Ultra Short Duration Fund and the history of the April 2020 closure here: FRANKLIN INDIA ULTRA SHORT DURATION FUND relaunch: Should investors again trust Franklin Templeton for this debt fund?.
Now that we have the first-ever debt mutual fund portfolio disclosure of Franklin India Ultra Short Duration Fund, we will analyse it to understand if there are any risks in the portfolio that might cause issues similar to those experienced in April 2020.
As per SEBI guidelines, specifically:
Para 5.1 of SEBI Master Circular on Mutual Funds dated May 19, 2023 and AMFI Guidelines circular no. AMFI/35P/MEM-COR/61/2022-23 dated November 18, 2022 on enhancing transparency pertaining to debt schemes and Disclosure w.r.t schemes subscribed by the investor,
every AMC with debt mutual funds must publish a detailed snapshot of the portfolio of all debt funds every fortnight. For equity funds, this is done monthly.
For Franklin Templeton, these disclosures are available here, and we are analysing the 30-Aug-2024 portfolio disclosure made available on 5-Sep-2024. This report covering Franklin India Ultra Short Duration Fund is examined to determine if Franklin Templeton is creating the same kind of liquidity risk exposure that led to the closure of six funds in April 2020.
The closure of the Franklin Ultra Short Bond Fund in April 2020, along with five other Franklin funds, was attributed to liquidity risk brought about by the COVID-19 pandemic. The official reason, as per Franklin Templeton’s website, was:
There has been a dramatic and sustained fall in liquidity in certain segments of the corporate bonds market due to the Covid-19 crisis and the resultant lockdown of the Indian economy, which was necessary to address the situation. At the same time, mutual funds, especially in the fixed income segment, are facing continuous and heightened redemptions.
| Rating | Portfolio % | Relative Liquidity |
|---|---|---|
| CRISIL AAA | 6.33 | ✔ |
| CARE AAA | 4.49 | ✔ |
| ICRA AAA | 1.79 | ✔ |
| CRISIL A1+ | 16.97 | ✔✔ |
| ICRA A1+ | 8.51 | ✔✔ |
| IND A1+ | 8.50 | ✔✔ |
| SOVEREIGN | 13.38 | ✔✔ |
| CASH | 40.03 | ✔✔✔ |
| Total | 100.00 | ✔✔ |
As the portfolio above shows, apart from the 40% cash, the remaining 60% is fairly liquid:
While bond market volumes cannot be compared to equity markets, this is a liquid portfolio, at least at first glance.
| Investment | Portfolio % |
|---|---|
| AAA Rated Bonds | 12.61 |
| A1+ Rated Certificate of Deposit | 25.50 |
| A1+ Commercial Paper | 8.48 |
| Government Securities | 13.38 |
| Call, Cash & Other Assets | 40.03 |
| Total | 100.00 |
Apart from the 12.61% in AAA-rated bonds, the rest of the investments have excellent credit quality:
We expect the cash component to decrease as the NFO amount is slowly deployed over the next few weeks.
As per SEBI categorisation:
Ultra Short Duration Funds invest in Debt & Money Market instruments with a Macaulay duration of the portfolio between 3 months and 6 months.
We examine the maturity profile of the bonds in the portfolio to check for any long-dated bonds. Long-dated bonds increase portfolio yield at the cost of a delayed ability to liquidate the portfolio in case of a crisis.
| Maturity Bucket | Portfolio % |
|---|---|
| Immediate | 40.03 |
| 3m - 6m | 32.11 |
| 6m - 9m | 14.48 |
| 9m - 1Y | 8.81 |
| 1Y - 4Y | 0.00 |
| 4Y - 4.5Y | 4.57 |
| 4.5Y - 10Y | 0.00 |
| Total | 100.00 |
Except for a small allocation of 4.57%, the rest of the portfolio is set to mature within one year. While this is not a cause for concern yet, we need to monitor how the 40% cash is deployed over time.
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This post titled Franklin India Ultra Short Duration Fund portfolio analysis: Is Franklin Templeton creating the same portfolio that shut its funds in Apr 2020? first appeared on 06 Sep 2024 at https://arthgyaan.com
