While their returns are impressive, fears of a rise in interest rates loom.
On January 19, 2009, the Securities & Exchange Board of India killed the fixed maturity plans (FMP) when fund houses were barred from declaring indicative yields on the schemes, which had to be listed on the stock exchanges.
Unwilling to lock in their money without knowing returns, investors stayed away. Due to this, these plans received less than Rs 400 crore since then to April 30, 2009.
“The share of assets held by FMPs is coming down. Their assets under management (AUM) were Rs 1.4 lakh crore in September 2008 and are now just Rs 60,000 crore,” said Krishnan Sitaraman, director-fund services and fixed income research at Crisil.
However, the Indian mutual fund industry’s AUM has only grown in the period, to Rs 5,51,300 crore as of April 30, 2009.
This tells us that fund houses haven’t lost all the FMP money. They are making efforts to see that FMP investors invest the maturity amount in other products — particularly short-term income funds.
Over the past one year, short-term income funds have generated an average return of around 11%, while the highest one-year return is around 15-16%. This is far ahead of the 5% returns that liquid funds have been offering for the same period.
A higher commission mutual fund distributors get on short-term income funds as compared with liquid funds is another incentive. Sitaraman said fresh money getting into FMPs is minimal.
“Once redeemed, the FMP money is being diverted to short-term and ultra-short-term debt funds. I am not seeing any money going out of the industry, though it may be going to different asset management companies (AMCs). Money is moving from smaller AMCs to larger AMCs with well-performing schemes.”
The higher returns from short-term funds do not come with a high risk, either.
“The portfolio quality is good. Most of the new exposure is to certificate of deposits issued by banks and commercial paper issued by manufacturing companies,” said a debt fund manager with a leading Indian mutual fund who requested anonymity.
Sitaraman said the P1+ (highest grade for less than one year instrument) and AAA+ account for two-thirds of the industry assets. Exposure to bank certificate of deposits (CDs), especially those issued by nationalised banks, is the highest and “has increased to 50%,” he added.
Exposure to risky sectors has been pared: “In September 2008 the exposure to realty sector was less than 5%. Now it is next to nothing.”
However, despite the good returns, fundmen are not optimistic on short-term plans.
“Short-term income funds are the next bubble to burst,” one fund manager told DNA Money. “The interest rates are going to move up soon.”
Interest rates and bond prices share an inverse relationship. As interest rates rise, fund managers sell their old bonds and buy the new, higher-yielding bonds. This drives down the prices of the old bonds, thus pulling down overall returns of the funds.
The fund manager further explained: “The only buyers of 2-5 year corporate paper in the market are mutual funds. So, when the interest rates move up and fund houses are willing to offload corporate papers, there would be no takers for them, thus hurting the short-term income fund returns.”
Other fund managers too suggest looking at short-term income funds with caution. “People looking to invest for the next 4-5 months can invest in short-term income funds. But one must pare down return expectations,” said Ritesh Jain, head-fixed income, at Canara Robeco Mutual Fund.
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