DYK: How to crystal-gaze into an FMP portfolio

One FMP can be very different from the other, depending on where it actually invests

As there are many fixed maturity plans (FMP) on sale on the mutual fund (MF) street these days, it would help if you get an idea of what an FMP intends to do with your money. Sure, all FMPs are closed-end debt schemes that invest—and stay invested—in debt scrips that mature just before the FMP matures. But one FMP can be very different from the other, depending on where it actually invests, which depends on the FMP’s tenor or how long after it redeems and returns your money. Here’s how you can make sense of your FMP and choose the one that you really need.

The grid

All FMPs, as per regulations laid out by the capital market regulator, Securities and Exchange Board of India (Sebi), are mandated to disclose details of where they would invest. An FMP cannot tell you the names of securities it would invest in, but it must give you two broad indicators: the type of securities it will invest in and how much it would invest in each of them, approximately, depending on their credit ratings.

Types of securities would include, certificate of deposits (CD), commercial papers (CP), non-convertible debentures (NCD) and so on. For instance, your FMP may say that it would invest 15-20% in CPs that are AAA-rated and 10-12% in CPs that are AA-rated.

Check the risk level

Although FMPs, by their design, are one of the least risky instruments in the MF industry, they are not completely risk-free. The risks are now largely curtailed, thanks to a few crucial norms that Sebi issued in the past four to five years. For instance, FMPs cannot invest in instruments whose tenors are more than that of the FMP itself.

Typically, FMPs that come with tenors of up to—or a little over—a year invest in CDs and CPs. CD and CPs are short-term instruments that typically mature within a year. While CDs are instruments that are issued by banks, CPs are issued by companies. Typically, CDs—especially those issued by government-owned banks—are considered to be safer than CPs. These are relatively less risky than NCDs.

Let’s look at some practical examples. IDFC Fixed Term Plan Series – 30, which closes on 3 September for subscription, says it will invest 60-65% in AAA-rated CDs, 15-20% in AA-rated CPs and 15-20% in AA-rated NCDs.

FMPs that come with a tenor of up to three years or more, especially five years, largely invest in NCDs. HDFC FMP 1875D August 2013 (1), which closed for subscription on 27 August, said it would invest 95-100% in just AAA-rated NCDs.

Sebi has mandated that fund houses can go up or down 5% of their stated allocation when they actually begin investing their FMP inflows. The offer document or the scheme information document or the key information memorandum carries these details. These documents are available on the fund’s website.