Fixed maturity plans feel the heat too

The negative sentiment in the equity market is beginning to spread to other instruments as well. Fixed maturity plans (FMPs), which were the flavour of the season last year, with a whopping collection of Rs 38,305 crore between December 2006 and February 2007, have collected barely Rs 13,000 crore in the same period this year. In March 2007 alone, FMPs had collected Rs 30,869 crore.

Suresh Soni, chief investment officer, Deutsche Asset Management Company, said one of the reasons could be the low interest rates of 8-9 per cent in December and January for three month to a year's instrument. The rates have gone up to 10 per cent for three months and 9.95 per cent for one year.

Mahendra, Jajoo, vice-president and head of fixed income, ABN AMRO, said a lot of money that came into FMPs went to bonds and short-term income funds due to the benign interest rate scenario in the last few months.

Also, there has been a shift in the investment pattern, from closed-ended FMPs to open-ended debt funds, which is a welcome development, Soni said.

FMPs are basically closed-ended debt-based products which come with a pre-specified tenure. The tenure can be three months or six months or even more.

The rate of return is "indicated" and not guaranteed as in the case of bank deposits. Moreover, the interest income from bank deposits is included as a part of income and taxed according to the income bracket. However, the taxation structure of FMPs is such that an investment for more than a year can provide benefits of "double indexation."

Here's how it works. For instance, if you were to buy an FMP on March 10, 2008 whose maturity date is April 2, 2009, the following would happen.

An individual would get the benefit of inflation index in 2007-2008 as he invested in that year. He will also get the benefit of inflation index in 2009-10 because the FMP matures in that year. So, by holding the product for just another 23 days (March 10, 2009 - April 2, 2009), he can get the benefit of double indexation.

Investors have been particularly enthused with FMPs because of the returns.

Last year, FMPs were offering 10 -10.25 per cent post-tax returns. They are offering a good 100 basis points less, between 9 - 9.25 per cent, this year.

However, things could be better in March. With tighter liquidity conditions, the yields of FMPs might improve leading to more inflows. Said ABN AMRO's Jajoo, "Investors are waiting for the second week of March to enter the FMP market because of advance tax payments."

The numbers also prove that. Both in 2006 and 2007, the collections rose sharply, from Rs 18,589 crore in February 2007 to Rs 30, 869 crore in March 2007 and from Rs 6,766 crore in February 2006 to Rs 11,867 crore in March 2006.