FMPs out of vogue on flat interest rate curve, changes in taxation rules
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Mumbai: The number of closed-ended fixed maturity plans (FMPs) being launched are declining over the last three years, as changes in taxation rules and relatively lower interest rates have discouraged fund managers to come up with these schemes with the same zeal as before.
Data from Value Research showed that mutual funds launched 216 closed-ended FMPs in fiscal year 2017. They had launched 289, 463 and 1,034 FMPs in fiscal years 2016, 2015 and 2014, respectively.
The funds raised through such schemes have also dwindled to Rs15,738 crore in the fiscal year 2017, from Rs1,36,088 crore in fiscal year 2014.
Closed-ended FMPs are mutual fund schemes that invest in debt instruments like certificate of deposits and commercial papers. The instruments in the portfolio are usually held till maturity. These schemes may not see a revival of interest any time soon either. A couple of factors are responsible for that.
Given their characteristics, fund houses tend to lure investors with FMPs in a rising interest rate scenario.
In 2014, the repo rate was at 8%, which has now reduced to 6.25%. On 6 April, the Reserve Bank of India’s (RBI) monetary policy committee (MPC) decided to raise the reverse repo rate, at which it drains excess liquidity from the banking system, by 25 basis points, reflecting its steadfast pursuit of inflation management.
“FMPs are out of vogue due to a flat interest rate curve, the credit growth rate is at a few-decade low. The current growth rate is only about working capital requirement, as capital expansion is not,” said Ritesh Jain, a former senior official in the mutual fund industry.
“Higher investable grade papers are missing, and the yield curve is not as steep to encourage fund houses to come up with FMPs,” added Jain.
According to Ganti Murthy, head of fixed income at IDBI Asset Management Co. Ltd, FMPs are also not as favoured as before due to changes in taxation. The indexation benefit can now be availed only after three years, instead of one year earlier.
In July 2014, during the National Democratic Alliance government’s first Union Budget, finance minister Arun Jaitley raised long-term capital tax on all debt funds to 20%. Earlier, withdrawal from debt funds attracted a long-term capital gains tax of either 10% (without indexation) or 20% (with indexation).
Additionally, it also increased the threshold to claim long-term capital gains tax on debt fund investments to three years, up from a year earlier.
“The tweaked tax laws for debt funds hurt the FMPs the most, and NFOs (new fund offers) of such schemes declined sharply after the changes in budget 2015,” said Kaustubh Belapurkar, director of fund research at Morningstar India.
Again, the fact that interest rates are not attractive could deter mutual funds for a while until they see that the rate cycle is indeed tightening.
“Unless the rates are very attractive, people will not enter. So unless we have more evidence that interest rates are indeed headed upwards, and attractive papers are available, mutual funds will not re-think on their strategy,” said Murthy.
R. Sivakumar, head of fixed income at Axis Mutual Fund, agreed. “Close-ended FMPs are generally preferred when interest rates are high and in the current scenario, it is premature to talk about an interest rate hike,” he said.