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Why most of the FMPs are faring so poorly?

FMPs have earned a bad reputation in the aftermath of the Essel group's loan against shares fiasco, says Ashutosh Gupta.

Why are most of the fixed maturity plans (FMPs) faring so poorly? Is it the end of the road for such schemes? I am stuck up with three such schemes which were launched with a lot of fun and fare. What to do?
- Rajender Kumar Gaur

Fixed maturity plans or FMPs, as they are popularly known, have earned a bad reputation in recent times, especially in the aftermath of the DHFL defaults and the Essel group's loan against shares fiasco. These were the kind of issuers within which many FMPs were found to have disproportionately high exposure and they paid the price for it. They caused a lot of heartburn among investors. And when these issuers defaulted or delayed the payments, in turn, the FMPs had to default or delay their payments to investors.

In principle, I don't think that FMPs were a bad product category. Inherently, they were quite suitable for somebody who had a very defined timeframe of investment to earn a predictable return. But as I said, perhaps some fund managers threw caution to the wind and basically violated the principles of prudence and diversification while building out the portfolios. And when these issuers defaulted, they paid the price for it.

As things stand now, there are hardly any new FMPs hitting the market these days. Now, I am coming to what you can do with your existing investments in FMPs. While theoretically speaking, there is an exit route available through the stock exchange because all closed-end funds, such as FMPs, are mandated to compulsorily list on a stock exchange to provide an exit window. But from a practical standpoint, there is not much liquidity in most FMPs. So, the exit option may not be available to you.

Under this circumstance, there is really little that you can do but to continue holding them till their maturity. And actually, depending upon when these funds came out and when you made these investments, and how well they are managed, they may not turn out to be bad investments from a yield perspective, given the kind of interest-rate scenario we are in and the kind of yield that you would otherwise get on open-ended funds. So, from that perspective, they may not turn out to be bad investments if you hold them till maturity.

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