Mutual Funds and SIPs in India
Debt Fund Risks: Lessons from Franklin Templeton
In 2020, Franklin Templeton closed six debt schemes after a liquidity crunch, showing that debt funds can be risky.
Debt funds can fail too.
What happened
In April 2020, Franklin Templeton wound up six debt schemes because it could not sell bonds to meet redemptions.
The cause
The funds held lower-rated, hard-to-sell bonds, and redemptions surged during the pandemic.
Effects
Investors’ money was locked for a time, and later returned in stages.
Reforms
SEBI tightened rules on liquidity and risk in debt funds.
Locked money
Investors who thought their debt fund was safe found they could not withdraw for months.
Assuming higher yield is free
Extra yield often means extra risk.
Key takeaways
- Franklin Templeton closed six schemes in 2020.
- Illiquid bonds caused the problem.
- Money was locked temporarily.
- SEBI tightened rules.
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