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Fixed maturity plans (FMPs), a debt product pushed in recent years by mutual funds (MFs), show signs of loss in popularity among investors.
At least five MFs have called off the launch of FMPs in the past three months, according to data from Value Research, an entity which tracks the segment. Three other schemes have extended the deadline for their New Fund Offers (NFOs), while many other funds have stopped launching FMPs with short tenures.
MF sector officials said investors showed lower appetite for FMPs, in anticipation of softer interest rates in the coming months. Expectations of a decline in rates have been reflected in the recent rally in government bonds, resulting in investors pouring money into gilt funds - MF schemes that invest in these securities. A portion of the FMP money might have flown into gilt schemes in the past couple of months
Schemes which have withdrawn NFOs include the Tata FMP Series 42E, Peerless FMP Series 2 and HDFC FMP 1107D Apr 2013 (1). HSBC Fixed Term Series 93 and SBI Debt Fund Series 90 Days-74 also called off NFOs they'd earlier announced.
Others have extended the deadline for subscription. These include LIC Nomura MF FMP-55 and LIC Nomura MF FMP 63, as well as Union KBC FMP-Series 27. Most fund houses did not respond to a request for comment.
Uday Suri, national head, sales & distribution, Tata Asset Management, said falling bond yields had contributed. "Because yields have dropped, and duration funds have performed very well in recent months, the relative attractiveness of FMPs has declined," he said.
There is an inverse relationship between yields and bond prices. As interest rates decline, the value of debt instruments held by schemes goes up; the longer the duration, the greater the chance of gains.
In 2012-13, FMPs, a close-ended debt product, raised a little over Rs 70,000 crore. These schemes accounted for Rs 1.01 lakh crore in the average of assets under management for the financial year ending March 2013, according to data from Value Research. This means they contributed to roughly one of every seven rupees held by MFs in FY13.
Besides the withdrawals and the deadline extensions, a declining trend is also seen in the number of schemes launched each month. The average number of FMPs launched in a month has declined to 54 so far in 2013-14 from 73 a month in FY13, shows Value Research data. These schemes were lapped up by investors in the past couple of years, as they fetched better returns than most other fixed income products in a high interest rate environment.
Now, investors are looking to reposition their debt portfolios to a changing interest rate environment, according to MF sector officials. "There could be fewer takers for shorter term FMPs as interest rates are headed down and longer duration products become more attractive," said the head of fixed income at an MF.
Kartik Jhaveri, director at Transcend Consulting, said investors could gain from the move away from FMPs, though at the risk of higher volatility. "The shift to schemes with longer duration paper helps to take advantage of capital gains as interest rates decline," he said.
However, there is still some appetite for FMPs among certain investors, say some. "There is still a class of customers who desire a product with less volatility than a duration fund and we continue to see some demand there, albeit less than what was seen 12-24 months ago," said Suri.
