Steep short-term rates attract firms with money to park; retail involvement low.
Mutual fund assets under fixed maturity plans (FMPs) have touched levels not seen since the collapse of Wall Street investment bank Lehman Brothers in 2008.
FMPs are closed-end debt schemes that come with a specific tenure, typically three months to a year. These schemes invest in debt securities that mature just before or on the date of the scheme’s maturity.
According to data from Value Research, a New Delhi-based tracker of mutual funds, these schemes accounted for Rs 1.2 trillion (lakh crore), or 16 per cent of the Rs 7.43 trillion mutual fund industry at the end of June.
Some of the larger fund houses have an even higher proportion of their assets in FMPs. Among the major ones, Kotak Mahindra MF has nearly 30 per cent of its assets under management (AUM) in FMPs.
ICICI Prudential has 24 per cent; Birla Sun Life, 23.5 per cent; SBI MF, 20 per cent; and Reliance, 19 per cent. In absolute terms, Reliance MF has the largest FMP corpus of Rs 19,181 crore.
RATE DRAW
Fund managers attribute this trend primarily to the favourable interest rate environment.
Lakshmi Iyer, head (fixed income and products), Kotak Mahindra MF, said: “Three-month and one-year FMPs are seeing the bulk of the inflows. Investors who are looking to lock-in (at high rates) are going for these funds.”
Corporate investors are being wooed by the high return of nine-plus per cent, nearly 50 bps more than what they get in liquid funds. “Cash-rich corporates which can afford to block the money for two-three months are going for these investments, as they see it as a better option than liquid funds. They can earn between 25 to 50 basis points more,” said N Seturam, chief investment officer, Daiwa Asset Management.
According to fund managers, given the steep short-term interest rates, FMPs are able to give returns of nine per cent or even more in some cases. Iyer of Kotak, however feels, the rate cycle has peaked “Finding incremental flows is going to be difficult,” she said. Seturam, though, feels it would take a quarter or two for rates to cool.
BACKDROP
FMPs fell off investors' radar when the industry went through some painful redemption pressure after the Lehman collapse. FMPs were at the epicentre of that crisis, as a significant portion of these funds had been invested in illiquid real estate sector instruments.
As redemptions hit, fund houses had to be bailed out by the regulators, with at least one getting sold off. From a high of Rs 1.26 trillion or 30 per cent of the industry’s AUM in October 2008, the share of FMPs fell to under three per cent by the end of 2009. Assets shrunk to a little over Rs 21,000 crore, a drop of 80 per cent in one year.
The rise since has been as spectacular. In the past one year alone, FMP assets have grown threefold, making it the most popular fund category.
Following the crisis, the Securities and Exchange Board of India had tightened rules for these schemes. It has put in place systems to ensure there are no premature withdrawals by investors and the fund managers are governed by strict rules to avoid asset-liability mismatches. “The credit quality (this time) is very high,” said Navneet Munot, chief investment officer, SBI MF.
ISSUES
But most fund managers are tight-lipped about exposure to papers of the high-risk real estate sector, which again is hungry for cash.
Lack of retail participation in FMPs continues to worry managers. At least 80 per cent of money in FMPs are institutional, say some estimates. “It is not possible to do big-bang marketing for FMPs, given the cost structures. But funds have been sending mailers to individual investors as and when they launch FMPs. Interested investors are making good use of this,” said an industry official.
