Prime QA: Is my fund facing redemption pressure?

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Question

negative cash balance?

I have invested some money into Franklin Savings fund.

I was going through the fund disclosure for the month of March 2020 and saw a negative cash balance. Does this mean they have borrowed to honour redemptions? Is this a red flag? I am honestly quite worried about the events that are transpiring.

Answer

Yes, Franklin India Savings had a little under 5% of negative cash as of March 2020. However, its portfolio as of April 23 suggests that it moved 35% into cash. That means the fund has liquidated some investments and kept cash ready, anticipating redemptions. So, to answer your question, no, the fund did not have any borrowings as of April 23.

 And between April 23 and April 29, the AUM fell by half. It is likely that the fund would have again liquidated its investments or borrowed post that. We do not have the data. But there does not appear any NAV impact up to April 29 and the movement seems in line with other similar category funds. This suggests that the fund did not have to sell anything in distress thus far.

Similarly, Franklin India Corporate Debt moved 40% to cash as of April 23 and has seen 26% decline in AUM between April 23-29. That means its cash was enough to meet redemptions.

Overall, since April 23, several credit risk funds as well as other debt categories have seen redemption. Some of the funds with over 20% AUM fall for April 23-28 is given below. Please note that this data is not comprehensive as there is lag in declaration of AUM data and not all the schemes are available.

SchemeAUM (Rs crore) Apr 28, 2020Fall (Apr 23-28)
BOI AXA Credit Risk Fund71.38-52.6%
Franklin India Savings Fund2157.8-48.4%
L&T Credit Risk Fund715.53-36.9%
Edelweiss Corporate Bond Fund19.44-33.0%
Franklin India Floating Rate Fund287.88-30.0%
Kotak Credit Risk Fund3041.51-27.7%
Aditya Birla Sun Life Credit Risk Fund2975.86-26.6%
Franklin India Banking & PSU Debt Fund1148.74-25.5%
PGIM India Credit Risk Fund157.29-25.1%
JM Dynamic Debt Fund94.7-24.8%
Aditya Birla Sun Life Medium Term Plan2626.1-23.7%
IDFC Credit Risk Fund1078.88-23.3%
Franklin India Corporate Debt Fund1167.22-21.5%
Kotak Medium Term Fund1924.44-21.4%
HDFC Credit Risk Debt Fund9451.3-21.4%
DSP Credit Risk Fund802.98-21.2%
L&T Low Duration Fund560.92-19.6%
L&T Resurgent India Bond Fund1166.14-19.4%
Nippon India Strategic Debt Fund638.94-19.0%
buy hold sell

Redemption pressure

The important thing to note is that not all funds that are faced with redemption pressure will end up closing their funds and not all funds with redemption pressure will see fall in their NAV. Much depends on:

  • How quickly they can sell their holdings (depends on how liquid their papers are)
  • How they can sell their holdings without taking too much of a price knock
  • Whether they are judiciously tapping the credit lines to avoid selling their papers at low prices

As portfolio disclosures are done once a month, it is not possible to check the liquidity situation. Some fund houses though are coming with details of liquidity in their portfolios. But here again, it is one off.

As an investor, the best you can do is to:

  • Make sure your fund does not have high credit risk
  • Keep exposure to 10% where there is a lesser proportion of AAA or A1+
  • Make sure you have enough emergency funds in bank savings or deposits

And if the redemption that is happening is troubling you much, then shift some amount to deposits – depending on your cash flow requirement. We think it is extremely hard to anticipate liquidity threats in these markets and your panic is justified.

Check out our report on debt funds during this Franklin Templeton crisis – https://www.primeinvestor.in/franklin-debt-funds-from-other-amcs/

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10 thoughts on “Prime QA: Is my fund facing redemption pressure?”

  1. I saw this listed in your less than 1 year recommend fund list. If there are risk shouldn’t this be out of your recommended portfolio list?

  2. Pretty Enlightening. Especially – “Not all funds that are faced with redemption pressure will end up closing their funds and not all funds with redemption pressure will see fall in their NAV”.

  3. Dear Vidya
    One of the outcomes of falling AUM is increase in Total Expense Ratio (TER). From what we have seen, the fund houses have no shame to increase the Expense Ratio, despite the fund not performing well. I wish PrimeInvestor gives more importance to TER. The fund houses should feel the pinch.

    1. Sir, you are assuming that we don’t consider it 🙂 It is taken at the very first level of rating filter and so considering it againa nd again does not arise. And I don’t think you should assume that a lower AUM means higher TER. Yes law permits them but some funds have consciously kept it low even when AUMs fall. For example, ABSL Dyamic Bond’s AUM almost halved between March 2019 and March 2020, while expense ratio both in direct and regualr went down. So, we cannot generalise these. And if we have to link performance to expense ratio, then investors should be willing to pay more by that logic when funds generate higher returns! And not like funds up expense ratio when they generate high returns 🙂 Economics of large AUM works towards lower cost while smaller AUM does not. The beauty of the product is the ability for an investor to ditch and move to a better one. Imagine doing this in an insurance product with high cost! 🙂 thanks, Vidya

      1. Thanks. I know PrimeInvestor considers TER. It is not just like that you became a prime source of unbiased information on MFs. In my opinion, when the AUM drops considerably, the MF house (including the one you mention above) will try to increase the expense ratio. While some of us (Direct investors?) are mindful of its impact, many are not. So it is worth highlighting at every opportunity.

  4. Good explanation about NAVs in debt funds. Could you educate us about impact on sentiment of equity MF of the same fund house? For instance, is there any change in cash holdings, NAV, SIP behaviour, redemption pattern, and AUM of equity MF such as Franklin India Prima Fund? Especially, in March and April 2020.

    1. Cash holdings, we keep discussing on and off when we speak of fund strategies. Investor behaviour – no such data sir. thanks, Vidya

  5. rinsy ansalam

    Is the data on number of investors and average size of investment per investor available for these funds?

    1. AMFI has NEVER disclosed investor data (only folio count is event available) leave alone average investment per investor. thanks, Vidya

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