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High-flying FMPs crash to earth as investors stay off

Thursday, 29 November 2012 - 8:30am IST | Place: Mumbai | Agency: dna

Dip in demand graph takes a toll; new fund offers drop from 153 in March to a measly 10 in October.

Fixed maturity plans (FMPs), once a darling with investors, are fast losing their halo. It’s not just investors but asset management companies (AMCs) which are increasingly giving this investment product a cold shoulder in the wake of slowing demand.

The numbers tell the story. From 153 new fund offers (NFOs) in March this year to only 10 NFOs in October, it has been a massive fall. The surge in March figure stands out because of the tax investment season and from there on, it’s a downhill road. But even going by that logic, the slide looks pretty alarming. For instance, there were at least 45 NFOs in October 2011 with an investment of Rs5,677 crore compared to only Rs745 crore in October 2012.

FMPs provide double indexation benefits, which kick in when you hold the product for more than one year. This gives investors an edge in taxation against other debt instruments such as fixed deposits and so sells like hot cakes in the tax-saving period of February to March.

Indexation takes inflation into account while calculating the cost of acquisition of an asset. Double indexation provides inflation benefits for two years even though you have held the investment for a little over one year, say 15 months.

Signs of investors exiting FMPs had started as early as June-end. The fallout was clear: that month, several fund houses had recalled their new fund offers from the market. A mutual fund distributor said this decline can be attributed to flagging corporate investments, which form a big chunk of the investing pie.

Does this mean you should also steer clear of FMPs? Financial planers and experts, however, disagree. “They not only give you the tax advantage vis-a-vis fixed deposits, but offer better returns,” said Pankaaj Maalde, head financial planner, apnapaisa.com.

A note of caution is that before casting your lot with an FMP, make it a point to look at the fund house and the quality of paper the fund is investing in. In fact, going ahead, financial experts say long-term FMPs of 3-year or 5-year maturity may suit investors in a falling interest rate scenario. This is because investment in long-term products mitigates the re-investment risk.

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