Fixed maturity plans (FMPs), which had become the most preferred type of debt funds in recent times, are now passé. Owing to cost inefficiency, fund houses have innovated with a new fund structure - debt interval funds. Which, in all practicality, are basically cost-effective FMPs.
FMPs charge very low expenses. As a result, the margins from managing these funds are either wafer-thin or non existent. In fact, many in the industry see FMPs only as an asset retention strategy which otherwise makes little business sense. In this backdrop, the prospects of FMPs were dealt a decisive blow when the SEBI hiked the filing fee to launch such funds four-fold. Earlier, fund houses had to pay a flat filing fee of Rs 25,000 to launch an FMP. But recently, SEBI increased it to three basis points of the amount collected, subject to a minimum of Rs 1 lakh. This made FMPs, particularly the ones with a very short tenure, highly unattractive for the fund houses. But they found the solution to their problems in the form of debt interval funds.
Let's take the example of a quarterly debt interval fund. This is a fund that offers a load-free subscription and redemption facility at quarterly intervals. During the intermittent periods, no subscriptions are allowed but redemptions may be permitted by paying a load.
The fund manager runs the fund just like a three-month FMP. And after this period, the fund is opened for redemptions or fresh investments for a brief period. Subsequently, it is again managed like a three-month FMP for the next three-month period after which again a liquidity window is available, and so on.
This structure makes them much more cost effective as the fund houses save the filing fee which they have to pay to SEBI every time they launch an FMP. In a debt interval fund structure, the filing fee has to be paid only once when the fund is launched. Subsequently, it's the same fund that keeps allowing fresh investments and redemptions.
These funds are also beneficial for investors. In an FMP, investors have to compulsorily redeem at the end of the tenure, pay the applicable taxes, and look for another FMP to re-invest. But in case of a debt interval fund, they need not redeem their entire investment after every interval but can roll it over. While we have discussed the concept taking the example of a three-month debt interval fund, it would work the same way for a fund of any duration.
So basically, these are just rehashed versions of the FMPs but because of the clear advantages they offer, debt interval funds are fast becoming popular. Till February 2007, we didn't have a single such product. But over the last six months, eight fund houses have launched such funds and together they manage Rs 8,000 crore.
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