When equities hurt investors turn to FMPs

Season's favourite fixed maturity plans mop up an unprecedented Rs 1 lakh crore

THE promise of steady returns amid an overall climate of uncertainty is drawing hordes of investors towards fixed maturity plans (FMPs) offered by mutual fund houses. With rising interest rates, FMPs are clearly the flavour of the season. These schemes have made an unprecedented collections this season, which according to some fund managers, is in excess of over a lakh crore rupees.
"This could easily be a record year with respect to FMP mobilisation. With most schemes indicating high yields (higher than most other debt products), there is huge interest from institutions and HNIs," said Principal PNB AMC business head-asset management Sudipto Roy.
In the past few years, fixed maturity plans have become a hot favourite with investors looking for investments in fixed income. This is not so hard to explain considering the advantages they offer on the tax, liquidity window and the diversification fronts, compared to fixed deposits. Even retail investors have been taking to FMPs in recent times, considering the prospects of good returns from the stock market looking bleak.
Fixed maturity plans are close-ended schemes of a specific duration, which mean that an investor can only withdraw his money after paying a penalty. Fund houses give an indicative yield as to how much an FMP will offer. For instance, FMPs of 13-month duration (after adjusting the inflation numbers) are currently returning anywhere between 11% and 11.5%.
Ramkumar K of Sundaram Mutual estimates that the outstanding investments with FMPs must be over Rs 1 lakh crore. According to Value Research, a portal that tracks mutual funds, the first six months of 2008 have witnessed investments worth over Rs 64,000 crore, but about 130 schemes yet to disclose their first phase collection.
Mr Ramkumar feels that FMPs will retain their attractiveness over other debt instruments considering the high interest scenario, implying that money will keep flowing into them. Investors typically rush for FMPs when interest rates look upwards and the stock market looks dicey. High net worth investors, retail investors and corporates that have a comfortable liquidity situation, usually invest in a longer duration of over a year. But, shorter duration FMPs have a larger share in the total mobilisation and corporates who are cautious on the liquidity front dominate this segment.
However, fund managers warn that FMPs are not absolutely risk free, especially when interests rates are rising, as they are now. A portion of the FMP portfolio of some funds could face default, thanks to tighter liquidity situation and deteriorating condition of many companies in sectors like infrastructure and real estate. This can lead to lower-than-indicative yield, no return or even capital loss.
While a fixed deposit attracts tax as per an investor's tax slab (over 33% for last slab), a 13-month FMP only invites tax of about 22% (after adjusting for inflation, which is called indexation). One can exit an FMP before its a tenure at a much lesser penalty than a FD. To achieve the kind of diversity available in an FMP, one would have to invest in FDs of several banks.
shailesh.menon@timesgroup.com