In the months following the introduction of stricter norms, it appeared that FMPs had lost their attractiveness. But they have staged a remarkable comeback. The Indian mutual fund industry, which until October 2008 was riding high on the bull run in equities, was halted in its track by the global liquidity crisis. Almost all mutual fund schemes came under redemption pressure, but Fixed Maturity Plans (FMPs) were hit particularly hard. In 2008 many FMP new fund offers (NFOs) had been launched, taking advantage of regulatory loopholes.

Highlights

SEBI’s special lending window and stricter guidelines help FMPs survive the difficult times Their revival was made possible by debt, liquid and liquid plus funds that performed poorly in the volatile market conditions To draw maximum benefits from FMPs, one needs to remain invested for a long term

But once the crisis struck, these very loopholes — indicative yields, unregulated portfolio declarations, and average maturity mismatch — resulted in a systemic breakdown for FMPs as panicky investors withdrew money from them. Finally, the Securities and Exchange Board of India (Sebi) had to intervene. To provide immediate relief, it opened a special lending window for mutual funds and later followed up with stricter guidelines for FMPs. Besides plugging the regulatory loopholes, it also made it mandatory for all closed-ended funds, including FMPs, to be listed on exchanges.

Read: Impact of Online Mutual Fund trading on Exchanges

Sebi regulations and their impact

The new Sebi regulations initially had a crippling impact on FMPs. FMPs were major contributors to the Indian mutual fund industry’s total assets under management (AUM). But investments in FMPs started dwindling after the new regulations took effect as institutional investors, the biggest patrons of these funds, stayed away from them.

On the positive side, listing of FMP schemes rid fund managers of liquidity-related worries (caused by sudden and large redemptions). With monthly portfolio declarations being made mandatory, there was greater transparency. The ceiling on allocation to a particular company led to more diversified portfolios. Exposure to risky real-estate and non-banking finance companies was curtailed. And finally, with disclosure of indicative yields being banned, there was less pressure on fund managers to invest in riskier securities in order to produce outsized returns.

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New FMP era

With the passage of time, however, fund managers have learnt to live with the new regulations. In fact, FMPs appear to have been rejuvenated. Between February and April 2009, 40 NFOs of FMPs were launched in which cumulatively mopped up Rs 6,000 crore from the market. Leading from the front were Reliance Mutual Fund and SBI Mutual Fund which raised Rs 2,000 crore and Rs 1,000 crore respectively. This strong showing helped FMPs find their feet again. The quality of investments has also improved as fund managers have refrained from investing in risky assets, including securitised debt.

Benefits of FMPs

FMPs are an attractive option in the current market scenario. Why? Debt instruments, which were favoured by investors for their extra returns over fixed deposits, have lost their sheen in the current volatile conditions. Returns from liquid funds and liquid plus funds have dipped to around 3-4 per cent and 5-5.5 per cent respectively after Sebi restricted them from investing in securities having maturity greater than three months. FMPs, by contrast, are exhibiting a lot of promise.

Besides, FMPs also offer investors tax benefits. Investors can avail of double-indexation benefit to improve their post-tax returns. For example, an FMP launched in February 2010 and having a tenure of 15 months can avail of double-indexation benefit for fiscal years 2010-11 and 2011-12.

Strong performance

In the past, FMPs caught investors’ attention as most funds beat their indicative yields as promised. It is assumed that since FMPs mostly invest in debt and debt-equivalent securities, their returns would range from 8-10 per cent. However, this is not the case. The top 10 mark-to-market (MTM) gains among FMPs (see table) range from 15 per cent to as high as 72.2 per cent. The MTM returns are mainly on account of the decline in interest rates, which has resulted in an increase in bond prices. Even the annualised returns of some of the schemes are startling. Schemes such as ICICI Prudential S.M.A.R.T.’s Series F, Series G and Series H have given annualised returns of more than 30 per cent.

Table: FMP Schemes with High MTM* Gains in 1-year Category
Scheme	Launch Date	1-Year Return (%)	Annualised Returns	YTD (%)
ICICI Prudential S.M.A.R.T.Sr G – 36M Ret	Nov-08	72.2%	59.65%	72.6
Birla Sun Life Equity Linked FMP Series A Ret	Jul-08	47.21%	8.81%	13.5
ICICI Prudential S.M.A.R.T.Sr F – 36M Ret	Oct-08	35.65%	29.84%	38.6
ICICI Prudential S.M.A.R.T.Sr H – 36M Ret	Dec-08	34.15%	34.90%	34.9
DWS FTF Series 50 Plan A	May-08	33.73%	6.98%	11.9
DWS FTF Series 43 Reg	Feb-08	25.28%	3.76%	7
DWS FTF Series 50 Plan B	May-08	20.5%	8.35%	14.3
Birla Sun Life Equity Linked FMP Series B Ret	Jul-08	19.85%	11.98%	18.5
Reliance FHF V 3Y Plan Series I Retail	Sep-07	15.94%	10.67%	26.7
Reliance FHF IX-Series 10 Inst	Jul-08	15.16%	13.24%	20.5
* Mark-to-market                                                              Source: www.valueresearchonline

Had investors been allowed to exit, as they could till December 2008, many would have preferred to take these gains even if it meant paying an exit load. But the lack of trading volume on the stock exchanges prevents them from doing so.

Since the central government and the central bank are likely to withdraw the monetary and fiscal measures provided during the crisis period, interest rates are likely to move up in the coming months. Since this will lead to a decline in the value of debt papers, returns are likely to be more moderate in future.

FMPs were pulled out of the morass by stricter Sebi regulations and improved market sentiments. They are now once again looked upon by investors as an attractive investment avenue that offers attractive returns along with tax benefits. But remember, if you want to reap maximum benefits from FMPs, you must stay invested in them till maturity.

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