An open-ended scheme investing in equity, arbitrage and debt.

What Is the Investment Objective of the Scheme?*

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The Scheme intends to generate long-term capital appreciation by investing a portion of the Scheme's assets in equity and equity related instruments. The Scheme also intends to generate income through investments in fixed income securities and using arbitrage and other derivative Strategies. There can be no assurance that the investment objective of the scheme will be realized.

*Source: Scheme Information Document

(Read: What You Should Read In A Scheme Information Document)

Is Franklin India Equity Savings Fund for You?

Equity Savings Fund as categorised by the market regulator, SEBI, is a Hybrid Fund. Meaning, it invests in equity and equity related instruments (including derivatives), debt & money market instruments, and would explore arbitrage opportunities. If there are no arbitrage opportunities available, the scheme has the flexibility to invest in debt.

Franklin India Equity Savings Fund (FIESF) is one such hybrid scheme from the stable of Franklin Templeton Mutual Fund. Under normal circumstances, FIESF will invest 65-90% of its assets in equity & equity related securities (including derivatives), and 10-35% in debt & money market instruments (including cash & cash equivalents and securitised debt). Further, the scheme may avail of arbitrage opportunities.

However, under defensive circumstances, FIESF may lower its allocation to equity & equity related securities to 15-56% (including derivatives), and increase the allocation to debt & money market instruments to 35-80%.

In addition, FIESF has an enabling provision to invest upto 10% in units issued by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trust (InvITs).

From a risk standpoint, given that FIESF portfolio will typically have a dominant exposure to equity and equity related instruments—including unhedged equities, the scheme is suitable only if you have a moderately high-risk appetite and have an investment time horizon of at least 5 years.

From a tax implication standpoint, since Equity Savings Funds invest a dominant portion of the net assets in equities, they are categorised as equity-oriented mutual fund scheme. If redeemed within a holding period of one year, Equity Savings Funds will attract a Short Term Capital Gain Tax (STCG) tax of 15%. And if redeemed after a period of 1 year, the Long Term Capital Gains (LTCG) in excess of Rs 1 lakh will be taxed @10%.

How Will Franklin India Equity Savings Fund Allocate Its Assets?

The asset allocation of Franklin India Equity Savings Fund under normal circumstances will be as under:

Instruments	Normal  Allocation (% of net assets)		Risk Profile High/Medium/Low
	Minimum	Maximum
Equity and Equity related securities	65%	90%	High
Of which Net Long Equity*	15%	65%	High
Of which Equity Derivatives**	0%	75%	Medium
Debt & Money Market Instruments including cash & cash equivalent^	35%	85%	Low to Medium
Units issued by REITs & InvITs	0%	10%	Medium to High

Under defensive circumstances the asset allocation pattern will be:

Instruments	Normal  Allocation (% of net assets)		Risk Profile High/Medium/Low
	Minimum	Maximum
Equity and Equity related securities	15%	65%	High
Of which Net Long Equity*	15%	65%	High
Of which Equity Derivatives**	0%	50%	Medium
Debt & Money Market Instruments including cash & cash equivalent^	35%	85%	Low to Medium
Units issued by REITs & InvITs	0%	10%	Medium to High

* Net long equity exposure is a directional equity exposure that will not be hedged. This equity exposure means exposure to equity shares alone without a corresponding equity derivative exposure.

** Equity derivative exposure would normally be taken against the underlying equity investments and such exposure will not be considered for calculating the gross exposure of the scheme.

^Investment in Securitized debt, if undertaken, would not exceed 20% of the net assets of the Scheme.

Further, it is stated in the offer document that:

• A maximum of 10% of net assets may be deployed in Units issued by REITs and InvITs and the maximum single issuer exposure may be restricted to 5% of net assets or up to the limits permitted by SEBI from time to time.

• The Scheme may use derivatives for such purposes as may be permitted by the Regulations, including for the purpose of hedging and portfolio balancing, based on the opportunities available and subject to guidelines issued by SEBI from time to time. The margin money deployed on derivative positions would be included in Debt & Money Market Instruments. The cumulative gross exposure through equity, debt and derivative positions shall not exceed 100% of the net assets of the scheme.

• The Scheme may also use fixed income derivative instruments (including imperfect hedging using Interest Rate Futures) subject to the guidelines as may be issued by SEBI and RBI and for such purposes as may be permitted from time to time.

• The Scheme shall not engage in securities borrowing and short selling activities.

• The Scheme shall not invest in foreign securitized debt.

• The Scheme may undertake repo transactions in corporate debt securities in accordance with the directions issued by RBI and SEBI from time to time.

• Investments in foreign securities including ADRs / GDRs / Foreign equity and debt securities shall not exceed 50% of the net assets of the Scheme.

• A maximum of 20% of net assets may be deployed in securities lending and the maximum single party exposure may be restricted to 5% of net assets outstanding at any point of time.

(Source: Scheme Information Document)

The Investment Strategy of Franklin India Equity Savings

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The scheme has a dual objective of generating income by investing in debt and money market securities as well as generating capital appreciation by investing in equity and equity-related securities.

Further FIESF would avail of arbitrage opportunities. It may invest into equity stocks in the cash market and take a short position in the futures market to avail arbitrage between spot & futures market and reduce net long equity exposure. The efficiency of the strategy depends on the availability of arbitrage opportunities in the market. There is no assurance that the scheme will always be able to capture such arbitrage opportunities.

(Image source: Product brochure)

Typically FIESF would invest in equity and equity-linked instruments of companies/corporations by following a multi-cap approach. To reduce the volatility of returns, it will actively use equity derivatives as a hedge.

As regards debt & money instruments, FIESF will typically invest in government securities (issued by both centre and state), corporate debt securities (viz. bonds, debentures, notes, etc. of public and private sector undertakings rated by credit rating agencies), Commercial Paper (CP), Certificate of Deposits (CD), Bills Rediscounting, Collateralized Borrowing and Lending Obligation (CBLO), Repo, Reverse Repo, Treasury Bills (T-Bills), and other instruments.

And the securities above could be acquired through IPO, available in the secondary market (i.e. listed), unlisted, privately placed, rights offer or negotiated deals and they could be rated or unrated securities across varying maturities. 

Who Will Manage Franklin India Equity Savings Fund?

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The equity portion will be managed by Mr Lakshmikanth Reddy, the debt portion by Sachin Padwal-Desai and Umesh Sharma, and overseas investments by Srikesh Nair.

Mr Lakshmikant Reddy holds over 22 years of experience and is the Vice President and Portfolio Manager – Equity at Franklin Templeton Mutual Fund. His prior assignments include ICICI Prudential Life Insurance Company Limited as Head – Equity; HSBC Capital Markets as Equity Analyst; ABN Amro Asia Equities as Equity Analyst; Unit Trust of India as Buy Side Analyst; and Crompton Greaves as Design Executive.

Mr Reddy holds a B. Tech in Mechanical Engineering from Jawaharlal Nehru Technical University, Hyderabad and a Post Graduate Diploma in Management from Indian Institute of Management – Ahmedabad.

Currently, at Franklin Templeton Mutual Fund he manages Franklin India Equity Advantage Fund, Franklin India Taxshield, Franklin India Equity Hybrid Fund (Equity portion), Franklin India Pension Plan (Equity Portion), and Franklin India Debt Hybrid Fund (Equity portion).

Mr Sachin Padwal-Desai holds over 21 years of experience and is the Vice President and Portfolio Manager – Fixed Income at Franklin Templeton Mutual Fund. His prior assignments include ICICI Bank Limited as a Strategic Rates Manager, plus has worked with Infosys Technologies Ltd and Thermax Ltd.

Mr Padwal-Desai holds a degree in metallurgical engineering (B.E. – Metallurgical) from Government College of Engineering, Pune, and also holds a Post Graduate Diploma in Management (PGDM) from Indian Institute of Management – Bangalore.

Currently, at Franklin Templeton Mutual Fund he manages Franklin India Government Securities Fund, Franklin India Dynamic Accrual Fund, Franklin India Liquid Fund, Franklin India Savings Fund, Franklin India Ultra Short Bond Fund, Franklin India Banking & PSU Debt Fund, Franklin India Debt Hybrid Fund (Debt portion), Franklin India Equity Hybrid Fund (Debt Portion), Franklin India Pension Plan (Debt Portion), Franklin India Life Stage Fund of Funds (Debt Portion), and Fixed Maturity Plans (FMPs).

Mr Umesh Sharma, who will also manage the debt portion of FIESF, holds over 14 years of experience and is the Vice President and Portfolio Manager – Fixed Income at Franklin Templeton Mutual Fund. Prior to joining Franklin Templeton in 2010, Mr Sharma was a Fund Manager – Fixed income at Religare Mutual Fund, worked with ICICI Bank as Chief Manager, JM Mutual Fund as Manager – Fixed Income, and UTI Mutual Fund as a Primary Dealer.

Currently, at Franklin Templeton Mutual Fund he manages Franklin India Government Securities Fund, Franklin India Dynamic Accrual Fund, Franklin India Banking & PSU Debt Fund, Franklin India Floating Rate Fund, Franklin India Debt Hybrid Fund (Debt portion), Franklin India Equity Hybrid Fund (Debt Portion), Franklin India Pension Plan (Debt Portion), and Fixed Maturity Plans (FMPs).

Mr Srikesh Nair, who will manage the overseas portion of FIESF, holds over 7 years of experience and is a Senior Manager & Research Associate. His prior assignments include Goldman Sachs, as Analyst (responsible for equity research across the USA listed large capital financial companies) Teekay Shipping, as a Trainee Marine Engineer.

Currently, at Franklin Templeton Mutual Fund he manages Franklin U.S Opportunities Fund and Franklin India Feeder – Franklin Europe Growth Fund.

Fund Outlook for Franklin India Equity Savings Fund

The launch of Franklin India Equity Savings Fund comes at a time when the Indian equity market has scaled to a new lifetime high.

Correspondingly also a time when the Indian rupee has hit a new low of 69.60 against the US dollar, oil prices are heated, inflation is trending up, and there’s pressure on India’s current account deficit and fiscal deficit.

 The RBI in the wake of rising inflation has gone on with two successive rate hikes, making borrowing dearer. And although the stance of the monetary policy has been kept neutral, successively rate also means that the RBI is going aggressively to counter inflation and achieve the inflation target of 4%.  Corporate earnings for some counters are encouraging, but it is mainly on account low base effect and margins have been flat on account of increase in input costs.

Such a scenario appears challenging for portfolio construction, particularly when the margin of safety appears to have narrowed. The 10-year benchmark yield is also moving northwards – nearing 8.0%. The longer end of the yield curve could prove risky in the near-term.

Nevertheless, the mandate of the fund could come as precaution provided the fund manager uses it thoughtfully to construct the investment portfolio, both equity (including derivatives) and debt, plus even while exploring arbitrage opportunities.

The fortune of Franklin India Equity Savings Fund will be closely linked to how the fund managers play their strategy while building the portfolio.

To read PersonalFN’s view, click here.

[Read: Skip NFOs, Instead Consider Building A Strategic Mutual Fund Portfolio]  

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Disclosure with regard to ownership and material conflicts of interest
 

1. Neither QIS, it's Associates, Research Analyst or his/her relative have any financial interest in the subject Company, except QIS receives fees for providing research to Quantum Equity Fund of Fund (QEFoF) which is Fund of Fund scheme managed by QMF and our associates has financial interest in the subject company.
2. Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report.
3. Neither QIS, it's Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront /annualized & trail), if any, for any Schemes by QMF to QIS is also at arm's length and as per prevailing market practices.
    

Disclosure with regard to receipt of Compensation

1. Neither QIS nor it's Associates have any compensation from the subject Company in the past twelve months.
2. Neither QIS nor it's Associates have managed or co-managed public offering of securities for the subject Company in the past twelve months.
3. Neither QIS nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject Company in the past twelve months.
4. Neither QIS nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months, except that QIS had receive fees for services under sponsorship agreement from Franklin Templeton Asset Management India Pvt. Ltd.
5. Neither QIS nor it's Associates have received any compensation or other benefits from the subject Company or third party in connection with the research report
    

General disclosure

1. The Research Analyst has not served as an officer, director or employee of the subject Company.
2. QIS or the Research Analyst has not been engaged in market making activity for the subject Company.
    

Subject Company means Mutual Fund Schemes

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