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Coming A Full Circle

From being a popular choice, FMPs lost favour in recent months. But they seem to be back in reckoning again

The last few months have been whirlwind times for Fixed Maturity Plans (FMP). From being one of the most preferred fixed income investments, they went down to almost being neglected, only to resurge once again of late.  

FMPs have been a popular asset class because of their tax efficiency and predictable returns. They accounted for 22 per cent and 17 per cent of the mutual fund industry’s total assets in October 2008 and December 2008 respectively. However, October’s liquid crisis affected them severely and in February 2009, their share dwindled down to 13 per cent.  

This whirlwind story begins in October 2008. The liquidity crisis faced by fixed income funds in October 2008 led to a change of rules by SEBI in December. FMPs, in their earlier design, had an asset-liability mismatch. While investors could get out of an FMP at any point of time, the underlying assets were not liquid enough to honour sizeable redemptions. SEBI fixed this problem by mandating the listing of new FMPs. Furthermore, FMPs were barred from giving indicative yields and portfolios.  

These changes seemed like signalling the end of the FMP era, which accounted for Rs 75,000 crore of mutual fund assets in December and an even higher Rs 1 lakh crore in September. And as anticipated, these assets did decline further, coming down to Rs 65,000 crore in February 2009. The falling interest rates also proved to be a trigger, making investors shift to income funds, whose assets increased by more than 70 per cent.

It wasn’t a surprise then that in such tough times, only four new FMPs were launched until February this year. These new FMPs are simpler in structure and the institution option (with lesser expenses) is not being offered commonly. Some plans from Birla Sun Life Mutual Fund - Birla Sun Life FTP Series BQ to Series BR have only the growth option on offer, completely doing away with the dividend option.

However, when everything looks to be going down south for the FMPs, a resurgence seems to have come in March 2009. After almost three bleak months, about 21 new FMPs have been launched in March. What remains to be seen is if they still find favour with investors after the poor image that they earned for themselves because of their portfolios and focus on the institutional investors.

Traditionally, new launches in the month of March every year have always been higher than in other months. This is largely because by holding on to their FMP investments for just over a year, investors can enjoy the benefit of double taxation with respect to their long-term goals. Furthermore, FMPs look much safer when compared to the volatility seen in income funds as the former hold fixed income instruments till their maturity, making their potential returns fairly predictable.

In 2007, over 550 FMPs were launched. In 2008, the number of new launches went over 650. Given these high numbers, should the slew of newly launched FMPs really mean their coming back to life? Well, only the coming times can tell.  

Meanwhile, here’s a look at the line-up of FMP launches in the coming months – Birla Sun Life FTP Series BQ and Series BR (26 months each), Birla Sun Life FTP Series BS, Series BT and Series BU (36 months each), Birla Sun Life FTP Series BK (380 days), SBI Debt Fund Series 13 Months – Series 10, Principal Pnb FMP 385D Series XI, Kotak FMP 13 Months - Series 5, Reliance FHF XII-Series 3 (372 days) and Series 4 (381 days), Religare Yearly FMP Series I Plan A (375 days), Religare Yearly FMP Series I Plan B (400 days), Principal Pnb FMP 385D Series XIII, IDFC FMP 13 Months Series 1 and DWS FTF Series 62 (13 months).