Mumbai: The rush to captivate clients with deep pockets and report ever-growing monthly asset figures is driving Indian mutual funds (MFs) to offer non-lucrative, but popular, fixed maturity plans (FMPs), industry experts said.
Such funds cornered 85% of the total Rs73,400 crore inflow into new funds in the first four months of 2007 and gave investors superior short-term returns, but their managers earned the least—some times nothing at all—from them.
Still, fund houses keep coming out with these plans and don’t even mind the related filing fees that often exceed their income from these plans.
“It is more a customer-retension strategy than a profit strategy,” Ajay Bagga, chief executive officer of Lotus India Asset Management, said.
“It keeps clients with you and hopefully you can sell other products down the line, which make up for this,” said Bagga, whose fund house derives 41% of assets from FMPs.
FMPs, close-end funds that invest in debt papers of concurrent maturity, are the darling of corporates looking for a profitable channel to park surplus cash.
Investors in fixed-term funds have often been the beneficiaries of low-management fees, because it improves their yield on investment, industry experts said.
For instance, SBI Funds Management charges no more than five basis points as net management fee for FMPs maturing within a year. In some cases, the fee drops to one or two basis points. On its part, the Securities & Exchange Board of India, the market regulator, charges a flat three basis points for each filing.
SBI Mutual’s FMP fees pale before the 10-15 basis point fees it charges for liquid funds, a close cousin of fixed-term plans. “This is all because of the competition,” R.S. Srinivas Jain, chief marketing officer of SBI Mutual Fund, said.
Corporate houses often prefer fixed-term funds that earn 9% or more, against 7-7.2% yielded by liquid funds. Given predictable returns of FMPs, the only selling proposition that a fund house can offer is sometimes a lower fee, he said.
“The best deal in the market are only possible because you are streching yourself in terms of earning lesser and lesser management fee.”
A. Raghvendra Nath, vice-president at Birla Sun Life Asset Management, broke into a laugh when asked if fund houses were doing social service. “The entire industry is like that,” he said, adding that there could be funds that actually lost money on running FMPs as their fees were lower than the costs.
While the race to garner more assets prompts fund houses to launch more and more FMPs, the job of fund managers is getting tougher. Though they are passively managed funds, the frequency of their launch keeps managers on toes, at times making them construct portfolios on a weekly basis.
FMPs, contributing more than 20% to India’s Rs3.5 lakh crore fund industry, have become the easiest and fastest way to attract assets and report an impressive month-end assets under management figure.