There was a time when fixed maturity plans (FMPs) were corporate India’s favourite debt investment. But new regulations have taken liquidity out of the picture, putting their future in doubt. Since October, FMPs have lost Rs65,000 crore—almost half their assets.
Photoimaging: Raajan / Mint
Two major regulatory changes have affected FMPs. First, market regulator Securities and Exchange Board of India (Sebi) has forbidden redemptions at net asset value (NAV) by new closed-end funds, instead mandating that these funds be listed on a stock exchange as a way of providing exit. The practice of announcing “indicative” yields and portfolios has also been disallowed. While the indicative yield rule isn’t a major dampener, the lack of NAV-based liquidation is a big issue. The listing is unlikely to result in any meaningful markets for FMP units. In any case, the whole point of FMPs was that they were predictable.
Is liquidity important? In the current climate, it is. Investors don’t want to get locked into an investment without any recourse. The result is there for all to see. Since the new rules came out, there have been no successful FMP launches.
It won’t be surprising if FMPs die out eventually. The old ones will be redeemed and no new ones will be launched. That would be a pity. Except for the liquidity problem, FMPs have many desirable characteristics. It’s also possible that as the economic situation settles down, liquidity shortcomings will seem to matter less and shorter-duration FMPs will make a comeback as a viable investment.
Liquid funds reined in
With both investors as well as fund managers forgetting risk, liquid funds were rapidly increasing maturity and chasing returns. Now, Sebi has put a tight upper limit on maturity. Liquid funds will have commoditized, near-identical but safe returns.
Such funds, along with being ultra-safe, are ultra-conservative. They are not really meant to be investments—just a way of earning a few points of returns on short-term cash that would otherwise lie idle in bank accounts. However, in the euphoric and risk-loving mood that everyone was in till a few months ago, asset management companies (AMCs) were vying for liquid-fund investments by touting superior returns.
The result was that while liquid funds gave better returns, they were taking higher risks as well. During 2008, the average return of the category was 8.3%. Some even gave returns in excess of 9%. It is highly unlikely that such returns could have been generated by sticking to safe, ultra short-term investments.