In the past few months, about a dozen of fund houses have recently withdrawn their fixed maturity plans (FMPs) issuances due to lack of investors. While some fund houses—like ICICI Prudential Mutual Fund and Tata Mutual Fund among others—have extended their subscription phase to pool in necessary investments and the required number of investors.
FMPs—a popular mutual fund products—seems to have failed to attract investors. Since many fund houses were concerned about their inability to raise minimum target amount of Rs. 200 million, they preferred to recall their FMPs during the subscription phase.
According to SEBI guidelines, FMPs should have a minimum of 20 investors and no single investor shall account for more than 25% of the fund corpus.
FMPs are close-ended schemes that have a fixed tenure. These schemes invest in debt and money market instruments maturing on or before the date of the maturity of the schemes. FMPs are attractive when short-term interest rates increase. Investors and corporates start investing in FMPs, having tenure ranging from three months to one year period, for higher yields. However, when interest rates go down, the product loses its charm due to lower yields.
Amar Ranu, senior manager-research & advisory (third party products), Motilal Oswal Wealth Management, said, “FMPs provide an opportunity to lock-in high yields without taking any significant credit and interest rate risks as these funds invest mostly in CDs (certificate of deposits) if the funds are of less than a year. Also, the fund structure helps in providing tax benefits in comparison to other traditional investment assets like FDs (fixed deposits), corporate bonds, etc.”
Speaking about taxation, Mr Ranu added, “An individual ends up paying 13.52% in FMPs if opted dividend distribution tax; if the double indexation benefit is availed, investors hardly pay any tax on the capital gains. However, once DTC comes into effect, FMPs may be shunned as they would lose their tax advantage especially on double indexation benefit.”
According to fund managers, smart investors and corporates have started to cut down their investment in FMPs due to the decline in short term rates to about 9.15% currently from 11.5% a few months ago.
Declining surpluses, over the past few months, have forced corporate investors to cut back their investments in FMPs. However, fund managers feel short-term debt products—like FMPs—still offer good investment opportunities from a risk-return trade-off perspective.