Fixed maturity fund plans on a roll

Over the past quarter, 32 out of 45 new fund offerings were fixed maturity offerings.

Fixed maturity plan (FMP) of the mutual funds seems to be the flavour of the season. Over the past quarter, 32 of the 45 new fund offerings were fixed maturity offerings.

These funds mopped up close to Rs 8,000 crore of the total collection of Rs 12,000 crore mobilised by new funds.

ABN Amro, which launched its 15-month FMP earlier this month, collected Rs 250 crore in three days.

At present, Sundaram Fixed Term Plan, which comes with five different maturity periods ranging from 100 and 800 days, is open for initial subscription.

FMPs are preferred as they provide predictable returns while being more tax efficient than fixed-deposits. Since the fund manager usually matches the maturity of the fund portfolio with that of the fund, there is little interest rate risk.

Dividends from mutual funds attract only a dividend distribution tax of 22 per cent as against fixed deposits which are charged at a marginal rate of income tax. So persons in the highest income bracket run the risk of being exploited.

Besides, FMPs with tenure of over one year qualify for indexation which substantially reduces the tax incidence. Even more, 13-month FMP can usher in the benefits of double indexation since it facilitates indexation benefits for two years.

A fund distributor who did not wish to be quoted said corporate investors were negotiating favourable rates with banks and getting these deposits packaged as mutual funds to take advantage of the tax differential.

"Fixed Term plans are popular as they give a good sense of the returns one could make apart from better tax-efficiency compared to plain vanilla debt funds," said Dheeraj Singh, fund manager, Sundaram Fixed Term Plan.

Another reason for why investors prefer FMPs currently is the high yield on short-term deposits. Referring to the yield on 3-month papers, Singh said, "the yields look very attractive."

Mahendra Jajoo, vice president and head of fixed income at ABN Amro Asset Management Company shared the same view.

When asked if the money was flowing out from equity into debt, Singh said, "Investors are looking at tax saving strategies as we are closer to the year-end. Money is being diverted from other debt categories, not equities." Institutional investors who face asset-liability mismatch are also investing in FMPs, Singh added.