Higher returns available on debt papers are luring fund houses into launching fixed maturity plans (FMPs) again, notwithstanding the fact that these schemes do not fetch much by way of fees.
Typically, FMPs, which invest in bonds, government securities, bank certificate of deposits, commercial papers and treasury etc, fetch only 20-50 basis points for a fund house. In other words, if you invest Rs 100 in an FMP, the fund house would get only 20-50 paise towards its expenses, including the agents’ fees. That’s no money making proposition for a business, one would agree.
Still, FMPs were popular with fund houses until early this year because they helped swell their corpus. Also, the money was locked in for a pre-stated duration, typically ranging from a month to 18 months.
Investors too took to these schemes with gusto because they helped earn a small but assured return, considering mutual funds always gave an indicative return. This is the reason we saw money pour into such schemes for much of last year as equities turned choppy.
However, on January 19 this year, the Securities and Exchange Board of India dealt FMPs a killer blow by prohibiting mutual funds from giving indicative yields on their schemes. Following the move, such schemes had dried out from the market.
Now, with debt paper returns improving, mutual funds have started launching FMPs again.
According to Arjun Parthasarthy, senior fund manager - debt, IDFC Mutual Fund, returns on 1-year paper have gone up by 75-100 bps since July.
This gives a fund house an attractive spread it can ill afford to let pass untapped.
“Earlier the difference between the liquid fund return and one-year paper was not much.
But today, the liquid funds are offering 4.5%, while bank certificates of deposit are providing 6% and NBFC commercial papers are giving 7%. So there is a 2.5% spread available,” explains Alok Singh, head of fixed-income at Fortis Mutual Fund, which has filed for an FMP.
The newfound interest in FMPs is visible in the number of such schemes being launched —- as many as 12 were launched in August alone.
Compare this with the January-July period, when a total of 24 FMPs were launched. In the corresponding seven months the previous year, 61 FMPs had seen the light of the day.
Going by industry officials, a deluge of FMPs may be waiting to be loosed. Many fund houses told DNA they were in the process of filing for new fund offers.
A rising interest rates scenario, as appears likely today, would only strengthen the trend.
“We expect inflation to be around 8-10% by March 2010 and it could be 6-8% by December itself. RBI too is likely to increase CRR and repo rate by 50 bps,” says Ritesh Jain, head - fixed income, Canara Robeco Mutual Fund, hinting that spreads could stay firm if not widen further.
But doesn’t their inability to offer indicative returns pose a hurdle? The Sebi communication in January had said, “Mutual Funds shall not offer any indicative portfolio and indicative yield. No communication regarding the same in any manner, whatsoever, shall be issued by any Mutual Fund or distributors of its products.”
Funds may have found a way of girding the ban. “Though we won’t disclose the entire portfolio, we can tell them the sectors. They know the prevailing interest rate scenario and so can take a call on the yields,” a debt fund manager said, requesting anonymity.
The bulk of the FMPs being launched are of 15-18 month tenures, purportedly to offer a double indexation benefit to the investor.
Jain of Canara Robeco MF said, “We don’t know how we would deal with issues such as listing, not disclosing portfolios. But there would be demand for 15-18 month FMPs as markets come back to the normal levels, which they already have started coming to.”
Another fund manager said, “Only informed investors such as HNIs (high networth individuals) or corporates invest in FMPs. They know what kind of levels are going in the market. We don’t provide indicative yields.”
Interestingly, NBFC papers, which were avoided about 18 months ago, are now being considered for investments, first because the returns are higher and secondly, because no NBFC has defaulted. “They have become acceptable to the market,” said Jain, adding, NBFCs with good parentage are preferred, though realty paper is still a strict no.
So, are FMPs a safe investment now? The jury is out on that, it appears.
“The arbitrage that is available today may or not be there tomorrow,” a mutual fund expert said on the condition of anonymity. “One has to evaluate an investment at the time of investing. Only later will you know (how it fared).
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