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FMPs Stuck on Losing Ground

Once-power-packed FMPs are going from crisis to crisis

After the October 2008 redemption trouble that fixed maturity plans (FMPs) faced and the subsequent steps taken by market regulator, the Securities and Exchange Board of India (SEBI), to prevent any such recurrence, in effect throttled this product, but FMPs are again back in the news. But not for agreeable reasons.

FMPs are close-ended income schemes. They have a fixed horizon and the investments of the scheme are redeemed on maturity. Investments are also made in line with the maturity profile of the scheme. Their tax efficient and predictable returns made them an important vehicle to park excess funds for corporate investors.

Since September 2008 when the assets managed under FMPs were at their highest (Rs 1,02,054 crore), they have already been redeemed to the tune of 43.79 per cent. As of April 2009, they stand at just Rs 57,360.91 crore, with the April 2009 redemption figure itself totaling Rs 16,999 crore.

Worse may follow for the segment, figuring from the current events. Not many FMPs have been launched since the new rulings came into force in December 2008. The month of March was, however, an exception when as many as 21 schemes were launched. But, as time passes, we are only going to see less and less of new FMP schemes being unveiled. As proof, only 2 new FMPs were launched in April, grossing a mere Rs 115 cr.

(Also Read: FMP launches in March - Coming A Full Circle)

All this is a direct consequence of the new norms issued by SEBI after the October crisis in the mutual fund industry. FMPs were poorly managed, and fund managers ended up investing short-term investment money in long-term securities to generate higher returns. When liquidity conditions tightened across the world, these instruments were found to be illiquid and funds could not withstand the redemption pressures caused by the meltdown forcing the government authorities to step in with a bailout. It was then mandated that all close-ended income schemes have to be listed on stock exchanges and mid-term redemptions will not be allowed through the fund houses. Moreover, they were barred from disclosing indicative yields and portfolios. This made launching new FMPs less luring for fund houses.

(Know more about the October Crisis - The Endangered Funds)

Another reason that FMPs are back in the news is not because of anything special that they have done recently. In fact, the linkage is indirect. The money redeemed from FMPs has been finding its way into income, liquid and gilt schemes, leading to a jump in assets under these schemes.

As a result, the assets under medium term income schemes have tripled, while those under liquid funds have doubled in the past 6 months (according to average assets under management (AUM) data disclosed by AMFI). Even assets under medium term gilt schemes, which form less than a per cent of total industry’s assets, have gone up 2.6 times during the same period.

Adding to their attractiveness is another overarching factor. Due to the slowdown in the economy, the Reserve Bank of India (RBI) has been reducing key benchmark rates. As a result, the income and gilt funds have been giving attractive returns. The month of April also saw net inflows of Rs 1.72 lakh crore in open-end income and liquid schemes.

What is clear from the travails of the FMP funds is that once caught short, the regulators may bail you out (in effect they seek to save the investors), but over the long run, you would have compromised your future irretrievably. Ergo, no comebacks.