Move expected to solve mutual funds’ liquidity problems.
Ending widespread speculation, the Securities and Exchange Board of India (Sebi) today confirmed that it will make early withdrawals from Fixed Maturity Plans (FMPs) tougher, a move that is expected to solve mutual funds’ liquidity problems.
At present, investors can exit FMPs by paying 2 per cent of the net asset value (NAV) at any point of time. Sebi sources confirmed that new FMP schemes will have clauses that make withdrawals before maturity difficult.
Market experts said this would imply that the new FMPs will have to be listed on the stock exchanges. This is because it is mandatory that schemes without exit options have to be listed. And investors who wish to exit will do so by selling their units at a discount.
FMPs faced severe redemption pressures in October, a month which saw the Bombay Stock Exchange’s benchmark Sensex fall a record 23 per cent. According to October-end data, the average assets under management (AAUM) of FMPs stood at Rs 127,080 crore, down Rs 10,718 crore in a single month. Over 25 per cent of the entire AAUM of the mutual fund industry is in this one product.
“Fund houses will benefit from this move because they will not have to bear the brunt of redemption pressures,” said a fund manager.
Sebi had sought FMP data from fund houses last month on their investment and redemption patterns. There are also expectations that the market regulator would limit exposure to a single sector. Earlier, there was news that some funds were forced to roll over their schemes because some companies, especially in the realty and non-banking financial companies (NBFCs), had defaulted on their commitments.
According to fund managers, Sebi is seeking to put a regulatory framework in place for these products.
Investors said such a move could make FMPs unattractive because it will make them less liquid. In the past three years, FMPs were doing fairly well because the interest rate was on the rise. Some schemes were even offering up to 12 per cent last month.
Also read:
Nov 11: Indicative yields of FMPs headed south
Nov 04: FMPs: Upset with mutual funds, investors shy away
