Weekly Musings – NFO Pick (Kotak Fixed Maturity Plan Series 329-90)

18 Mar 2024 , 07:20 AM

WHY A FIXED MATURITY PLAN

Over the last few months, our focus was more on equity and hybrid plans; either active or passive. This week we are covering the Kotak Fixed Maturity Plan Series 329-90 NFO, which closes on the coming Tuesday. The fixed maturity plan (FMP) is a good way to park short term funds for higher risk-adjusted returns. There is one more advantage in a fixed maturity plan, especially if it is at the short end like the Kotak Fixed Maturity Plan Series 329 NFO. In such cases, the interest rate risk is quite low since most of the funds are invested in very short term instruments at the short end of the yield curve. However, in the quest for higher returns FMPs do go down the quality curve and that makes them medium risk in term so the default risk of the fund.

WHERE WILL KOTAK FIXED MATURITY PLAN SERIES 329-90 NFO INVEST?

The Kotak Fixed Maturity Plan Series 329 NFO will invest in a combination of money market and debt instruments based on an internal policy for selecting assets. The selection of instruments is based on ratings, rating migration, credit premium over sovereign yields, macros etc. The portfolio will maintain a high quality portfolio and manage credit risk well. The portfolio of the Kotak Fixed Maturity Plan Series 329 will include securities issued by central and state government and other debt & money market instruments issued by corporates also. Care will be taken to ensure that all instruments will mature on or before the date of FMP maturity (redemption date). It will carry credit risk and liquidity risk.

The risk of the Kotak Fixed Maturity Plan Series 329-90 will vary depending on the bias of the portfolio. For instance, corporate bonds carry higher amount of risk than government securities. Even within corporate bonds, AAA-rated are comparatively less risky than bonds, rated AA, or less. The listed market price of the Kotak Fixed Maturity Plan Series 329-90 NFO is a function of two factors. Firstly, it depends on the intrinsic value of the unit (or NAV), and the demand and supply of units in the market. Like any stock, the traded price of Kotak Fixed Maturity Plan Series 329-90 can also be out of sync with the underlying NAV.

WHO SHOULD INVEST IN KOTAK FIXED MATURITY PLAN SERIES 329-90 NFO

This fund is most suited to bond investors who want to earn a slightly higher return and are willing to take higher risk too. These FMPs are normally preferred by the HNIs and the corporates for their treasury parking of funds. Hence, even a difference of 50 bps in returns makes a huge difference as the volumes of investment tend to be substantial. These fund will be invested between 0% and 100% only in debt instruments with low to medium risk profile. The tenure being 90 days for the FMP means all the instruments purchased by the fund will either be a very short term instrument or a long term instrument will unexpired term to maturity of less than 90 days.

Investing in debt and money markets can be complex as it entails selection of the right instrument, the right maturity, and the right rating profile. This is normally best left to the professionals and that is where this FMP comes in handy for investors. Considering the nature of its portfolio, the Kotak Fixed Maturity Plan Series 329-90 NFO will be category as a B-1 fund; meaning fund with low interest rate risk but medium credit risk.

PERFORMANCE OF FIXED MATURITY PLANS (FMP) IN INDIA

Here is a quick look at the leading closed ended Fixed Maturity Plans (FMP) in India as of March 15, 2024. These are CAGR returns for beyond 1 year, and pertain to direct plans. The table below has been ranked on 1-year returns and only the top 20 funds have been featured in this list.

Scheme Name	NAV Direct	Return % 1 Year	Return % Launch	Daily AUM (₹ in Crore)
Kotak FMP Series 304 – 3119 Days	11.04	9.76	8.55	102.15
Bandhan Fixed Term Plan Series 179	15.13	9.00	8.61	312.78
ICICI Pru FMP – Series 85 10 Years Plan I	15.10	8.98	8.58	413.93
Nippon India Fixed Horizon Fund XLI – Series 8	14.84	8.94	8.40	58.77
SBI Fixed Maturity Plan – Series 1 (3668 Days)	14.82	8.88	8.23	43.72
SBI Fixed Maturity Plan – Series 34 (3682 Days)	12.47	8.83	5.88	25.11
HDFC FMP 2638D February 2023	11.01	8.76	9.48	141.41
SBI Fixed Maturity Plan – Series 6 (3668 Days)	14.44	8.71	7.89	31.63
Nippon India Fixed Horizon Fund XLIII – Series 5	11.31	8.68	6.21	159.21
Nippon India Fixed Horizon Fund XLIV – Series 1	11.19	8.22	7.89	67.81
HDFC FMP 1876D March 2022	11.13	8.13	5.62	29.81
HDFC FMP 1861D March 2022	11.17	8.08	5.62	425.63
SBI Fixed Maturity Plan – Series 60 (1878 Days)	11.13	8.05	5.27	225.59
SBI Fixed Maturity Plan – Series 61 (1927 Days)	11.16	8.05	5.69	305.78
Birla Sun Life FTP – Series TQ (1879 Days)	11.13	8.03	5.57	199.07
Nippon India Fixed Horizon Fund XLIII – Series 1	11.43	8.03	5.34	207.23
SBI Fixed Maturity Plan – Series 58 (1842 Days)	11.23	8.01	5.44	229.20
SBI Fixed Maturity Plan – Series 49 (1823 Days)	11.41	7.98	5.30	358.41
SBI Fixed Maturity Plan – Series 54 (1842 Days)	11.24	7.97	5.09	34.37
Birla Sun Life FTP – Series TI (1837 Days)	11.56	7.97	5.49	287.06
DSP FMP Series 264 – 60M – 17D	11.30	7.93	5.00	46.51
ICICI Pru FMP – Series 88 1303 Days Plan S	10.80	7.92	7.92	58.68
HDFC FMP 1406D August 2022	11.09	7.92	6.87	232.03
SBI Fixed Maturity Plan – Series 52 (1848 Days)	11.26	7.90	4.95	125.34

Data Source: AMFI India

For all the funds, we have considered direct plans so that the TER does not distort the returns on these fixed maturity plans (FMP). There are 67 close-ended fixed maturity plans (FMP) in India managing a total corpus of nearly ₹13,379 Crore. Out of these 67 funds, the AUM is fairly well spread across the various fund names with all fund category AUMs being under ₹1,000 Crore. Here are the highlights of the performance of fixed maturity plans (FMP) across time frames.

• The return dispersion is quite low, which is understandable. On a 1-year returns basis, the fixed maturity plans (FMP) universe in India has generated maximum returns of 9.76%% and minimum returns of 7.92%, showing very limited variation due to similarly portfolio of most funds and time frame predictability. The average returns over a 1 year period are 7.92%, but these FMPs come in a wide range of time frame options.
• Based on returns since launch, the fixed maturity plans (FMP) universe in India generated maximum returns of 9.48% and minimum returns of 4.89%, showing a fairly high variation on a longer time frame basis. The average returns since launch were 6.52%, but here the returns have less to do with the period and more with interest rates.
• We have also tried to compare the performance of these funds with their underlying benchmark across maturities. On a median basis, the one-year returns are almost at par with the underlying index. However, on a returns since launch basis, the FMPs tend to falter compared to the benchmark.

Most of the funds are very short term in nature, but the advantage in an FMP is that the maturity of the underlying assets would be approximately in sync with the maturity of the FMP (being a closed ended scheme). Hence scheme returns are a lot more predictable.

GLANCE AT THE KOTAK FIXED MATURITY PLAN SERIES 329 NFO

Here are some details of the Kotak Fixed Maturity Plan Series 329 NFO you must know to decide on investing in the fund.

• The NFO of Kotak Fixed Maturity Plan Series 329-90 opened for subscription on March 14, 2024 and will close on March 19, 2024. Being a closed ended debt scheme with a maturity of 90 days, there will be no buy and sale offered by the fund at NAV linked prices. However, the fund will be listed on the stock exchange as per SEBI requirement.
• On the Standard SEBI Risk-O-Meter, the Kotak Fixed Maturity Plan Series 329 will be ranked as a Low to Moderate Risk However, bond funds are classified specifically based on the Potential Risk Class (PRC). Kotak Fixed Maturity Plan Series 329 NFO is classified as a B1 funding meaning low interest rate risk and moderate default risk. The low interest rate risk is due to short term focus of the holdings and the higher default risk is due to inclusion of private sector debt also in the portfolio.
• The Kotak Fixed Maturity Plan Series 329 NFO offers an opportunity to investors to park their funds for a short period of 90 days. Normally, this is treasury money parking that is done by HNIs and corporates to take care of monetary needs after 3 months, such that the money also productively earns returns in the interim period. Normally, such FMPs offer higher risk adjusted returns to the investors.
• Investors can invest in the NFO in minimum size of ₹5,000 and in multiples of ₹10 thereof. This also applies to switch-ins during the NFO. The question of Exit loads do not arise as it is closed ended fund. The fund will be wound up and redeemed at the end of 90 days. Investors have the option to exit in the market where the fund will be listed. However, in such cases, the relevant brokerage cost and statutory charges will apply. The initial costs of the NFO will be borne by the AMC and only subsequent costs will be billed to the AUM in the form of total expense ratio (TER).
• The Kotak Fixed Maturity Plan Series 329 NFO will offer the growth option as well as the dividend payout option. It will offer the facility to invest via the Regular Plan or through the Direct plan. The NAVs on redemption will be different based on the TER imputed to the fund. All fund units will be issued at a face value of ₹10 only. The NAVs of the growth plan and the IDCW plan will also be different if dividends are declared.
• The fund will be benchmarked to the Nifty Liquid Index to evaluate whether the fund is underperforming or outperforming the underlying benchmark. The fund managers for the Kotak Fixed Maturity Plan Series 329 – 90 day plan will be Deepak Agrawal and Manu Sharma.
• The Kotak Fixed Maturity Plan Series 329 NFO is a debt scheme with a term to maturity of 90 days. Hence the capital gains on this fund will be short term capital gains and the tax will be applicable at the peak rate of tax applicable to the individual investor. It may be noted that effective Union Budget 2023-24, all funds will less than 35% exposure to equity will not carry indexation benefits on long term gains any longer.

The Kotak Fixed Maturity Plan Series 329 NFO is an opportunity for investors to park short term funds at above average returns. However, it would be advisable for the investors to consult their investment advisors and check the fit according to their return requirements, risk appetite, liquidity needs and tax status.