Mumbai: Fixed maturity plans (FMPs) of asset management companies may have to find new avenues to deploy their funds with India’s stock market regulator, Sebi, mandating that no mutual fund scheme can invest more than 15% of its net assets in short-term bank deposits. FMPs are short-tenure debt funds that invest in instruments such as government bonds, commercial papers, and term deposits of banks and non-banking finance companies. Typically, these funds offer investors a return between 7% and 8% a year.
According to data provided by Value Research, a firm that tracks mutual funds, 463 FMPs currently manage around Rs88,000 crore worth of assets, roughly 25% of the assets being managed by the Indian mutual fund industry. Large fund houses such as Reliance Capital and ICICI Prudential Mutual Fund have more than Rs10,000 crore worth of assets each in FMPs.
On Monday, Sebi also said that mutual fund schemes should not deposit more than 10% of their net assets (within the overall 15% limit) in short-term deposits with any one commercial bank. The 15% limit could be raised to 20%, it said, with the permission of the trustees of the fund houses. Sebi has defined short-term as a period not exceeding 91 days. Funds will have to comply with the rule within three months.
The regulator has also made it clear that the same investment rule will be applicable to the fund houses where deposits with their sponsor banks are concerned. For instance, schemes of HDFC Mutual Fund and ICICI Prudential Mutual Fund will not be allowed to invest more than 20% of any scheme in their sponsor banks. ICICI Prudential’s three-month FMP series has 60% of its assets in short-term deposits including 18% in its associate sponsor, ICICI Bank.
Several finance-sector analysts said the order would hurt the ability of banks to mobilise deposits. A treasury head of a mid-sized private sector bank, who did not wish to be identified, said the “overall exposure of mutual fund schemes in term deposits of banks” would come down.
The Sebi norm will, however, benefit the investors as the mutual funds were resorting to passive money management by putting money into short- term bank deposits. About 9-10% of deposits in excess of Rs10 crore with banks come from mutual funds. Fund mangers will now have to mange money more actively.
According to a senior executive at a large public sector bank who did not wish to be identified, some private banks and fund houses normally forge an arrangement by which fund money flows into bank deposits and vice-versa offering both entities tax advantages. “These banks will have to face the heat now,” he said.
Executives in mutual fund companies downplayed the impact of the order.
“Our schemes won’t see any major impact as our internal norms for investing in fixed deposits are more and less in line with the new regulations,” said A.K. Sridhar, chief investment officer, UTI Mutual Fund. But according to Value Research, UTI’s one-year FMP series has invested Rs 568 crore, roughly 48% of its total assets in short-term deposits.
The head of marketing at a large private sector mutual fund, who did not wish to be identified, said the Sebi order was much needed. “Some fund houses have been investing their assets of three-month FMPs in one-year fixed deposit to earn extra returns. This is done by rolling over the FMPs. Now, with Sebi barring funds from investing in bank deposits of over 91-day maturity, they won’t be able to do so,” he said. One-year bank deposit offers higher return than three-month ones.
“This issue has been debated for a long time. The funds have been moderately conscious about it,” said Dhirendra Kumar, CEO, Value Research India.
Nicholas Winsor, head personal financial services, HSBC India said, the Sebi order wouldn’t affect the funds managed by the company.
“At HSBC, a fixed maturity plan from our asset management does not necessarily invest only in short-term deposits of the bank. We have schemes deploying funds across deposits of various banks, well within the limit,” he added.