FMP inflows give mutual funds their best month in 4 years

Mutual funds raised the most money in a month in four years through new fund offerings (NFOs), in March, as asset management companies lined up a slew of fixed maturity plans (FMPs) to take advantage of conducive market conditions.

Total monthly collections through NFOs during the latest month stood at Rs28,278 crore, the highest since March 2007 (Rs34,880 crore), according to data from the Association of Mutual Funds of India. Of this, Rs28,091 crore was raised by 137 new debt fund schemes launched during the month. Of this lot, again, 134 were closed-ended FMPs, which together raised Rs27,912 crore.

FMPs are basically a type of closed-ended debt funds with pre-specified tenures, ranging from three to 15 months. They invest in fixed-income instruments such as certificates of deposit (CDs), commercial papers (CPs), money market instruments, corporate bonds, debentures of reputed companies, or in securities issued by Government of India and fixed deposits.

Thus, FMPs tend to generate steady returns over a fixed period, protecting investors’ money from market fluctuations.

Experts attribute the surge in March to the year-end phenomenon wherein mutual funds come out with a high number of FMPs to take advantage of higher interest rates. For the whole of last fiscal, the sale of new FMP schemes was aided by volatile stock markets and tight liquidity conditions, which lured investors to debt funds.

“Seasonally, activity levels in the economy go up in the last quarter. Also, maximum credit off-take takes place in the months of February and March, which forces banks to raise large amount of money through certificates of deposit. As the CP/CD rates for short duration were touching 10-10.2%, many investors preferred to lock in their money in FMPs at these attractive rates,” said Maneesh Dangi, head - fixed income investments at Birla Sun Life Asset Manangement.

Experts also point out that some of the investors would have invested in FMPs to take advantage of double indexation, apart from getting higher returns.

“The high number of FMP issuances is not only a function of rate hikes by the RBI to counter high inflation, but also due to tight liquidity conditions wherein the market rates shot up by 425 basis points (bps) over the same period when the key policy rates went up by 175-200 bps. Also, FMPs offer traditional indexation benefit, which further aids sales. However, the form in which they will get the benefit under the new direct tax code regime is still not clear,” said Nandkumar Surti, CIO, JP Morgan Asset Management.

FMPs offer double indexation benefit if the tenure is slightly more than 12 months, thereby offering tax savings.

Incidentally, the liquid funds saw the highest ever net outflows of Rs98,255 crore in March 2011 as tight liquidity conditions and relatively better returns from other high yielding instruments forced corporate investors and banks to pull out money from these funds.
Liquid funds are basically open ended funds that invest in money market instruments like certificate of deposits, commercial paper and treasury bills for shorter duration.    

These are highly liquid and can be redeemed at a short notice of one day.

Experts say the number of FMP issuances will fall in the current quarter as the short-term CP/CD rates have come off their highs. While three-month CD rates have fallen to 8.25%, one-year deposits are yielding 9.50%. Even the CP rates have fallen to 9% and 9.90% for the respective tenures.