Mutual funds, banks help each other with fixed maturity plans

Fund houses seem to be using fixed maturity plans (FMPs) to augment their month-end assets under management through a quid pro quo arrangement with banks.

Here's how it works: FMPs of mutual funds are mostly subscribed to by banks. Thankful for subscribing to an FMP, the fund house puts the subscription money into a fixed deposit scheme of the same subscriber bank.

The funds give banks a higher return that they would get either in the call money market today or if they parked it with the Reserve Bank of India through the repo window.

Banks offer the funds with a slight mark-up on their fixed deposit rates.

It thus is a win-win situation for both.

FMPs are of varying maturities that is linked to the type of instrument. These are 15-day and one month schemes, which typically start around the middle of a month and end in the middle of the next month.

Since investments by FMPs are usually in fixed instruments, returns are quite assured and fund houses can invite subscriptions giving indicative returns.

Interestingly, earlier, Serial Plans, which are also fixed maturing plans, were used by fund houses as portfolio schemes.

Fund houses enter into such mutually beneficial arrangements with the smaller private sector "" or at times public sector "" banks.

No fund official was willing go on record about this, while most of them are quick to point fingers at one another over involvement.

Industry sources also say that FMPs of such short duration earn virtually nothing for the fund houses, but only helps bloat their assets at the end of the month.

Under the mutual fund regulations by the Securities and Exchange Board of India (Sebi), FMPs can primarily invest in debt instruments such as bonds, debentures and money market instruments.

The fund invests in such instruments holding them till maturity. While there is nothing in the regulations that prohibits the funds from investing in fixed deposits, industry sources point out that it is unethical on their part to do so since Sebi regulations also state that FDs are to be used only if there are no other investible instruments available.

FMPs of longer duration are attractive for tax reasons too. A 90-day FMP with an indicative yield of around 8 per cent can give a pre-tax return of around 11 per cent (under the growth option).