Fixed Maturity Plans (FMPs) seem to be generating some amount of interest among mutual fund investors once again. These plans were the target of investors’ ire during the later part of 2008.
With equity markets moving up sharply over the last few months, lots of investors are unwilling to take higher risks. Experts say there will be more investor interest in FMPs if interest rates move up from here.
FMPs are close-ended funds with maturity period ranging from three months to five years. These plans are predominantly debt-oriented, while some of them may have a small equity component. The objective of such schemes is to generate steady returns over a fixed-maturity period and make the investor immune to market fluctuations.
“With call money rates hovering around 3-3.5 per cent, people are moving from liquid funds to short-term debt funds. Long-term rates have become unattractive. So, for somebody who gets locked in an FMP of 12 months, it still offers him/her better returns and protection from volatility,” said Rupesh Nagda, head of Alchemy Wealth Management.
Perhaps gauging the investors’ mood, fund houses such as Deutsche, Franklin Templeton and Kotak Mutual Fund have filed FMP offer documents with the Securities and Exchange Board of India (Sebi).
FMPs had fallen out of favour with both investors and fund houses after Sebi tightened norms governing such schemes. In its new guidelines on FMPs, the market regulator had stopped fund houses from giving indicative yields and made listing of such schemes mandatory. To minimise the asset-liability mismatch risk, fund houses were also barred from holding papers with maturity of more than the tenure of an FMP.
In 2008, FMPs had felt the redemption heat when a large number of investors started redeeming due to poor credit quality of some of the schemes. Some FMPs had huge exposures to the real estate sector and non-banking finance companies (NBFCs), which led to the panic.
“We have seen revival of investor interest. While now there would not be the same frenzied interest to invest in FMPs as we saw in 2006-07, but certainly there is a section of investors looking at it. In a rising inflationary scenario, FMPs give better yields. There is not much return left at the shorter end of the curve, so it makes sense for investors as FMPs are offering 7.5-9.5 per cent annualised, tax-efficient returns,” said a distributor.
