As expected the telecom operators (excluding Reliance Jio) missed the January 24, 2020 deadline to pay the dues. Telecos are finding it extremely difficult to meet the payment timeline given the large quantum of dues and are hoping for relief measures from the government. The operators are planning to wait until next week for their future course of action when the Supreme Court (SC) will hear the `modification' petition filed by them.

But even as the telecos await the decision, Franklin Templeton mutual fund immediately marked down its entire exposure in debt securities of Vodafone Idea (VIL) post the apex court's verdict. Further, it has restricted fresh inflows in the schemes with exposure to debt securities of VIL.

[Read: Telecom Crisis: Will Mutual Funds Plug Out of the Sector?]

FTMF on its website stated, "Debt securities of VIL held in the schemes of FTMF have been marked down to zero. The valuation adjustment 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 VIL. The schemes will continuously monitor the developments in VIL and take appropriate steps to recover the investment proceeds in the best interest of its unitholders.

Fresh inflows in the scheme have been limited to INR 2 lakhs per day per fund per investor, till further notice. This limit is imposed only on the new applications received after the cut-off time on 16th January 2020."

It further stated that, "A limit on purchases will help ensure that once clarity emerges and as resolution takes place, the interest of existing unitholders has not been significantly diluted in the interim through fresh purchase activity while limiting the inconvenience to retail investors."

Table 1: NAVs of schemes with exposure to VIL take a knock after mark-down

Scheme Name	Exposure as % of AUM	NAV
		15-01-2020	16-01-2020	% change
Franklin India Low Duration Fund	6.5	22.4302	20.8889	-6.87
Franklin India Income Opportunities Fund	4.9	23.1216	21.9330	-5.14
Franklin India Credit Risk Fund	4.7	20.0487	19.0635	-4.91
Franklin India ST Income Plan	4.4	4094.4245	3907.8192	-4.56
Franklin India Ultra Short Bond	4.2	26.6546	25.4930	-4.36
Franklin India Dynamic Accrual Fund	4.1	69.6830	66.7002	-4.28

(Source: ACE MF, franklintempletonindia.com)

VIL owes AGR dues of over Rs 50,000 crore to the government. VIL Chairman Kumar Mangalam Birla had earlier stated that they will have to shut shop if the Centre does not provide any relief. This puts VIL at a greater risk of default and rating downgrade.

Among other telecom operators, Bharti Airtel has better chances of survival and the ability to compete with Reliance Jio. Bharti Airtel recently raised Rs 21,240 crore through QIP and FCCB. It proposes to utilise the proceeds for any payments that may be required to be made towards AGR dues.

According to FTMF, it was a prudent measure to protect value for existing unitholders in its schemes. Since there was no rating downgrade after the court's decision, the side-pocketing was not an option.

Franklin Templeton has the highest exposure among mutual funds to the debt papers of VIL. Other AMCs like UTI Asset management Company, Aditya Birla Sun Life AMC, and Nippon India Life Asset Management with significant exposure to VIL debt may follow suit and mark down the exposure.

Table 2: Mutual funds with highest exposure to debt of VIL

AMC	Market value (Cr)	Holding% (Assetwise)	Holding% (OverAll)
Franklin Templeton Asset Management (India) Private Limited	2074.08	3.33	1.67
UTI Asset Management Company Private Limited	557.45	0.82	0.36
Aditya Birla Sun Life AMC Limited	514.40	0.34	0.21
Nippon India Life Asset Management Limited	243.85	0.30	0.12

Data as on December 31, 2019
(Source: ACE MF)

Since the debt paper of VIL still belong to investment grade, it has raised concerns whether Franklin Templeton compromised the interest of existing investors.

According to media reports, SEBI is probing the write-downs carried out by mutual funds post the SC's rejection of the review petition. However, FTMF has denied the reports and has clarified that they have not received any query from SEBI in this regard.

In the past FTMF had exposure to toxic papers of Reliance ADAG, Amtek Auto, and Jindal Steel and Power. It seems FTMF has taken a leaf from the IL&FS crisis and decided not to rely heavily on credit rating or wait for the securities to be downgraded to junk rating.

[Read: Are You Holding Debt Mutual Funds With Stressed Assets?]

Table 3: Ratings of Voda-Idea debt continue to be constrained

(Source: franklintempletonindia.com)

FTMF's move is perhaps in the best interest of the investors and the AMC is well within rights to mark-down its exposure rather than waiting for an affirmation from rating agencies.

The schemes would have faced huge redemption pressure in case of rating downgrade and FTMF would have been forced to sell its high-rated and liquid securities to meet the demand. Consequently, this would have led to increased overall exposure to VIL in the portfolio.

What should existing investors do?

As the mark-down has already been done by FTMF, investors may continue holding the schemes. If you try to redeem the schemes now, you may suffer losses because the NAVs took a hit after the exposure was reduced.

The NAVs of the affected schemes may recover if the other holdings in the portfolio perform well. Further, a potential recovery from VIL in the future is likely to benefit unitholders of FTMF.

Word of caution

It is important for you, as an investor, to approach debt mutual funds with caution and your eyes wide open. Do not assume debt mutual funds to be risk-free

Before investing in debt funds, understand the credit risk involved. If one does not pay attention to the portfolio characteristic of a debt mutual fund scheme, it can result in making the wrong investment choices, thus leading to wealth erosion.

If you invest in a process-driven fund house, with less dependence on concentrated exposures (for generating higher returns), and focus on portfolio characteristics, it can help reduce the risk involved in debt mutual fund investment.
 

Editor's Note: If you wish to select worthy mutual fund schemes, I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect.

Additionally, as a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.

Each fund recommended under FundSelect goes through our stringent process, where they are tested on both quantitative as well as qualitative parameters.

Every month, PersonalFN's FundSelect service  will provide you with insightful and practical guidance on equity mutual funds and debt schemes - the ones to Buy, Hold, or Sell.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!

Add Comments