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Kotak MF to merge FMP Series 242 with corporate bond fund

FMPs have definite launch and expiry dates. Unless investors reinvest the money in a new FMP or open ended mutual fund, assets are lost for the MF industry. (Photo: iStock)Premium
FMPs have definite launch and expiry dates. Unless investors reinvest the money in a new FMP or open ended mutual fund, assets are lost for the MF industry. (Photo: iStock)

  • Kotak Corporate Bond Fund is a conservatively managed scheme and has delivered returns of 5.68% over the past year and 8.33% over the past 3 years. It has a yield to maturity of 5% and an expense ratio of 0.66%

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Kotak Mutual Fund will merge its FMP Series 242 with Kotak Corporate Bond Fund. Kotak FMP Series 242 is set to mature on 18 October. The scheme was launched in August 2018 and has delivered a CAGR of 7.92% since inception. The move could provide a template for the mutual fund industry to retain assets of expiring FMPs. Kotak FMP Series 242 has assets under management (AUM) worth Rs236 crore.

FMPs have definite launch and expiry dates. Unless investors reinvest the money in a new FMP or open ended mutual fund, assets are lost for the MF industry. 

In August, markets regulator Securities and Exchange Board of India (Sebi) had barred Kotak Mutual Fund from launching any FMP for the next six months and also imposed a fine. The regulatory action was on account of Kotak Mutual Fund extending the maturity of FMPs exposed to Essel Group paper, post their expiry. The extension was done to implement a standstill arrangement between Essel promoters and various mutual funds including Kotak in order to give promoters time to repay their debts. Hence, retaining existing FMP assets may have assumed greater importance for the fund house. 

“Corporate bond fund portfolio is similar to FMP portfolios in credit ratings. Currently investors don't want to lock their money for 3 years. We are giving an option to investors to remain invested in an open ended fund offering a similar risk return profile," said Nilesh Shah, CEO, Kotak Mahindra Asset Management Company.

Since the merger is a change of fundamental attributes, investors have the option to exit free. However the exit option must be actively exercised by giving a redemption request in the exit period. In case of Kotak FMP Series 242 this period is till 18 October. Exercising redemption is different from ordinary FMP maturity where money is automatically credited for an investor’s account when the FMP matures. Hence investors who wish to receive their money on maturity need to proactively give a redemption request. 

For investors staying put, Kotak Corporate Bond Fund is a conservatively managed scheme. Kotak Corporate Bond Fund has delivered returns of 5.68% over the past year and 8.33% over the past 3 years. It has a yield to maturity of 5% and an expense ratio of 0.66% on its regular plan. Investors staying put would also avoid capital gains tax since a merger does not attract tax liability. Investors will only face capital gains tax when they redeem their units from the corporate bond fund and at that time they will have to calculate their gains in relation to the original value of units purchased. However, stamp duty is imposed at a rate of 0.005% in the process of merger.

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