The Securities and Exchange Board of India (Sebi) effectively killed fixed maturity plans (FMPs) on January 19 when it banned mutual funds (MFs) from giving out indicative yields.
Under the rules, MFs could not guarantee returns. The indicative yield was no guarantee, but at least it gave investors some idea of the kind of returns they could expect from their investments.
Much like fixed deposits, an FMP has a certain maturity, ranging from a month to 18 months. Hence, an FMP maturing in one year looks to invest in securities maturing in a year’s time. The way it worked, an FMP would give out an indicative yield based on the return such securities were giving. But once Sebi banned indicative yields, FMPs almost vanished from the market. With no certainty on returns, who would want to invest in them?
Surprisingly, however, FMPs made a strong comeback last month. Between the last week of August and end-September, as many as 29 new FMPs were launched.
What gives?The old tool is at work again, MF industry sources would have us believe. Fund houses are back to declaring prospective yields, albeit “informally” to distributors.
“Most of the investors are so conservative that they won’t invest until you tell them how much you would make at the end of investing. They want to know the price tag,” said a Mumbai-based independent financial advisor, requesting anonymity.“AMCs tell us that they will be investing in AAA+ grade securities or certificates of deposit (CDs) etc and so conservatively one can expect 6-6.5% yield,” he added.
The practice appears to be rampant across asset management companies that have launched FMPs recently. “One hears of investors comparing yields across FMPs. This is strange since they should not be given an indicative yield and it is possible that there is some informal communication that is taking place at the sales level,” said a chief investment officer (CIO) with a leading mutual fund house. “There is no smoke without fire.”
This informal communication is akin to MFs telling their distributors about dividends being declared well in advance. By law, an MF has to declare a dividend within five days of announcing it, but most distributors have information regarding when a dividend will be declared well in advance.
When DNA spoke to fund houses earlier on how they plan to market FMPs without indicative yields, they said the savvy investors were aware of the market rates and could gauge the relative returns they might earn.
The CIO echoed that. “A lot of sophisticated investors would know what the one-year returns for CDs and financial securities issued by non-banking finance companies currently. This would allow them to know the returns on an approximate basis.”
But some fund managers refute that indicative yields are being declared.
“Currently, the funds can only be deployed after the closing of the FMP. It is not possible to arrive at an indicative yield for a period in the future since interest rates may fluctuate in the interim and be considerably changed by the time of deployment,” a debt fund manager said.
All the same, selling the product is far from easy. “We are finding it difficult to sell FMPs without having any indicative yields and portfolios. There were a lot of NCDs and fixed deposits from companies such as JP Associates, Shriram Transport and Tata Motors that people invested in as they declared attractive interest rates instead of FMPs,” Vinay Dhoot, a financial planner based out of Nagpur said.
“We don’t push this product (FMPs) anymore. Earlier, we used to send out a lot of emails to clients,” said the financial advisor, blaming the low commissions paid on FMPs.
Why then are fund houses still lining up these products?
“There were a lot of FMPs, which were launched in the October-December period of last year since the RBI was tightening rates due to inflation. These are now maturing and the same investors are getting back their cash. There is another fear of rate hike, which makes the returns on 2-4 year plans attractive,” another fixed-income head said. Liquid funds are giving returns of 3.5-4% and two-year fixed deposits are not giving as much return as FMPs, he added.
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