Fixed maturity plans in demand

Fixed maturity plans in demand

New Delhi: Money managers in India are scrambling to launch fixed maturity plans (FMPs) on hopes the prospect of better returns than liquid funds will help revive interest in one of the most popular fund categories of 2008.

As many as 18 new FMPs have been launched this month, data from ICRA Online shows, and offer documents of at least 10 more are awaiting clearance from the regulator Securities and Exchange Board of India.

FMPs offer a specific maturity to the investor and invest in debt and money market instruments of the same maturity, thus using the interest payments on those papers to generate returns.

Falling short-term rates and regulatory changes have dented returns on liquid funds, which park funds in instruments up to 91 days, helping boost demand for FMPs which invest in medium-term and long-term papers as well.

“Liquid, liquid plus (fund) returns which were earlier probably in the range of 6-7% have now fallen to... 4-5%," said Bekxy Kuriakose, head of fixed income at DBS Cholamandalam Asset Management Ltd.

“FMPs can give higher returns now as compared to liquid plus or liquid funds ... now there’s a good rate differential."

FMPs briefly lost favour as liquid funds were also investing in similar paper and promising liquidity as well, but a recent regulation change which compels liquid funds to invest in paper maturing in up to three months brought investors back.

So, only five new FMPs were launched between April and August, of which three collectively raised only Rs200 crore, while total assets under such plans fell by nearly half to Rs35,000 crore, the Association of Mutual Funds in India’s website shows.

With such plans making a comeback, fund houses will woo retail investors, especially those looking to invest for more than 12 months as FMP returns can be more tax efficient than traditional bank deposits in some cases.

The new 18-month FMP of Tata Asset Management Ltd that closed earlier this month raised around Rs530 crore, a spokesperson for the fund house said, adding that there was a drastic increase in retail participation.

FMPs can generate 150-200 basis points higher return than liquid funds in the current environment, Kuriakose said, which can even prompt some investors to forgo their liquidity requirements and invest in these close-ended products.