Fund houses line up fixed maturity plans as bond yields continue to rise

The hardening of bond yields has spurred launches of fixed-maturity plans (FMPs) — fixed-tenure mutual fund (MF) schemes that invest in debt securities with matching tenure of the scheme.

The yield on the 10-year government security on Friday ended at 7.42 per cent. In the past six months, the yield on 10- year G-Sec has risen by nearly 100 basis points.

Kotak MF and Union MF, in recent weeks, have filed offer documents with the Securities and Exchange Board of India (Sebi) to launch FMPs. According to industry players, more fund houses can follow suit.

G Pradeepkumar, chief executive officer, Union Asset Management Company: “In the past few weeks, we have seen that yields on debt papers have moved up significantly. We believe with the rising yields, it shall make sense for investors to lock in at the higher rates and that is the reason we have filed offer documents with the regulator to launch FMPs. If rates continue to rise, we may come with another series.”

Once popular among investors to park surplus funds, FMPs have lost their appeal following a spate of credit events after 2018. But with improvement in the overall economy, fund houses are once again planning to line up such products for investors.

According to market players, the attributes of FMPs are similar to that of fixed deposits and hence, generally appeal to investors. The tenure of an FMP can vary between a few months and a few years and many are structured in a way to get the tax benefit accruing out of indexation.

The returns of FMPs have turned attractive in the past few months. The data from Value Research shows that on average, FMPs have delivered returns of 1.1 per cent in the past three months — the highest across the industry. For the past one-year period, the returns have been 3.84 per cent, higher than other categories like overnight, liquid, money market, and ultra-short duration funds.

“FMPs can help lock in the current high yields, and offer visibility of returns as they buy and hold the underlying papers until maturity,” says an industry executive.