Last week, three fixed maturity plans (FMP) returned money to unitholders without having invested a single paisa. These were three-year FMPs that had aimed to invest in fixed income instruments with maturity of up to three years.

According to data from Fundsindia.com, an online mutual fund (MF) distributor, more than 25 FMPs have called off launches since 1 July.

“Our FMP was aimed at retail investors. At times, retail FMPs can find it tough to collect 20 crore. But this happens all the time; the nature of the product is such that some can get called off," said the chief executive officer of one such fund house.

Capital market regulator Securities and Exchange Board of India (Sebi) has laid down a three-pronged rule for FMPs. First, there should be at least 20 investors. Second, an FMP has to collect at least 20 crore. And third, no single investor can invest more than 25% of the scheme’s initial corpus collected. If an FMP fails to meet any of these three criteria, it cannot go ahead with the scheme, and it must refund the investors.

To be sure, closure of FMPs and refunds is not a new phenomenon. But of late, the pace appears to have picked up. “Earlier, one or two FMPs a month were getting called off. But recently, it is one or two a week," said Srikanth Meenakshi, co-founder and chief operating officer, Fundsindia.com.

A key reason for the pull-backs is the trend of falling interest rates. The benchmark 10-year government security rate has fallen to 8.144%, from its 2014 peak of 9.104% (in April)—down 96 basis points. One basis point is one-hundredth of a percentage point.

“When interest rates go down, investors prefer to invest in actively-managed funds that tend to benefit more in a falling rate scenario," said Sandeep Gandhi, a Rajkot-based financial planner.

Although an FMP cannot assure or indicate any returns, a fund house typically keeps a rate of return in mind before launching such a plan, based on market conditions. If markets swing wildly between the time an FMP is launched and deployed, the fund house may choose to refund the money to investors.

According to data from Fundsindia.com, many fund houses have seen one or more FMPs being called off. Birla Sun Life Asset Management Co. Ltd, Deutsche Asset Management (India) Ltd, ICICI Prudential Asset Management Co. Ltd, and L&T Investment Management Co. Ltd are among these.

“Getting 20 investors is not tough. But ensuring that a single investor does not end up owning more than 25% is a challenge. As is getting 20 crore, especially in a retail FMP," said a chief executive officer of a fund house on condition of anonymity.

Should you be worried? Absolutely not. During times like these, when interest rates are expected to fall, FMP pull-backs are more frequent. Plus, there are alternatives. Whatever money the fund house made while your investments were deployed temporarily, pending investing in debt markets, is given to you as interest. Refunds usually take five working days. Besides, there are scores of FMPs that do get launched to choose from.

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