Liquidity crunch in the market is expected to peak in March—the heaviest month for advance tax collection and also the end of the financial year—and experts say fixed-income maturity plans (FMPs), which are likely to yield good returns towards the end of the month, might come as a windfall of sorts. As on 7 November, FMPs accounted for Rs80,000 crore or 15% of the total assets under management.
FMPs of mutual funds (MFs) invest in short-term debt instruments such as certificate of deposits or overnight call money. These could have a three-month, six-month or 12-month maturity period, which rolled over once they are readyfor redemption.
“Money put in today for redemption towards the end of March can give good returns provided two major Fed rate cuts are not announced during the month,” said R. Rajagopal, chief investment officer of DBS Cholamandalam Asset Management Ltd. The end of December is the right time to invest in 90-day FMPs given the high rate of interest expected in March because of the liquidity crunch towards the end of the financial year, said Sameer Kamdar, country head of mutual funds Mata Securities India Pvt. Ltd, a Mumbai-based MF tracker.
Last month, in an attempt to tap the market, asset management companies launched more quarterly schemes than annual schemes. Consider this—in October, most of the 26 FMPs were annual ones, with only four quarterly in tenure. This changed in November with quarterly FMPs jumping to 19, with a reduction in annual plans to only 11. “This was because the yields on quarterly FMPs hardened with 90-day FMPs returning around 8.60-9.00% in November, as against 7.95-8.00% in August,” said Kamdar.
The yield went up because in November, the Reserve Bank of India hiked the cash reserve ratio by 50 basis points to 7.5%. Because of tight liquidity conditions, call rates went up from the level of 6%. “Considering the performance rate of the last financial year, when yield went up to 11% in March on the back of a liquidity crunch, the rate is expected to go up this time too,” Kamdar added.
FMPs, however, showed flat growth in November, with only 36 funds being launched, compared with 35 in October. November was not so bright for the MF industry because the total assets under management saw a dip of Rs18,787 crore, to close the month at Rs5.37 trillion. This was because call rates hardened to more than 7.50% by mid-November, leading to redemptions from liquid funds.