Fixed Maturity Plans (FMPs) keep on catching the attention of investors in phases. In the January-April period last year, over 288 FMPs hit the market. That was a big jump from the previous years when not more than 100 FMPs were launched in the first four months of 2009 and 2010. This year the record has been broken. The first four months of 2012 saw the highest number of FMPs being launched over the past four years – 350.
Why so much interest in an investment where liquidity is an issue? Simply because of the higher interest rate scenario and uncertainty in the equity market. Investors prefer tying up their money in a closed-end scheme for a fixed tenure to earn a double digit return.
During the start of the current calender year it was widely anticipated that interest rates would start dropping. Naturally, investors wanted to lock in their money at a high rate. In the first quarter of this year, Certificates of Deposit (CDs) were returning close to 11 per cent, an instrument most FMPs invest into. “It made sense to lock in money at such levels for three months or one year as there was a lot of uncertainty in the open-ended debt schemes,” says Dwijendra Srivastava, Head, Fixed Income, Sundaram Mutual Fund.
In the month of March, nearly 155 FMPs were launched for investors to take advantage of double indexation benefits. If FMPs were launched in March 2012 with tenures of, say, 13 months, they would mature in April 2014. Hence, the indexation benefits would be all the more relevant since they span different financial years. “The rates were quite attractive at that time and investors investing in February-March also got indexation benefits. We also saw a lot of high net worth individuals (NHIs) shifting their money from liquid schemes to FMPs during that time,” Murthy Nagarajan, Head, Fixed Income, Tata Mutual Fund, says.
Since it does not look like interest rates will be falling in a hurry, the demand for FMPs has not dampened. One-year CDs are still available at approximately 9.75-10 per cent rate. Hence, last month, over 30 FMPs were launched while dozens of offer documents are waiting for clearance from the Securities and Exchange Board of India (SEBI). “With negative returns in equity markets, investors are more than willing to put money in FMPs with 8-10 per cent returns. We believe that interest rates are likely to remain at elevated levels in the coming months, so investors will benefit if they lock in their money into one-year FMPs,” says a fund manager on the condition of anonymity.