Fixed maturity plans coming in hot: Should you invest?

Last few weeks have witnessed several fund houses launch their FMPs or fixed maturity plans. Among these fund houses are Aditya Birla Sun Life Mutual Fund, HDFC Mutual Fund, ICICI Prudential Mutual Fund, Kotak Mutual Fund and SBI Mutual Fund. Nippon India Mutual Fund, Axis Mutual Fund and IIFL Mutual Fund are in the documents filing process with SEBI.

The industry may see lots of new FMPs offered to investors as the fiscal year end approaches.

What are FMPs?
FMPs or fixed maturity plans are a fixed-tenure mutual fund scheme that invests its corpus in debt instruments maturing in line with the tenure of the scheme. However, they are closed-end in nature. The tenure of an FMP can vary from a few months to a few years.

So why this sudden launch of new FMPs?

• One major reason can be the surge in the yields of debt securities in the last few months because of the interest rate hike by the RBI to tame inflation. Mutual funds collected over Rs 3,703 crore and Rs 1,532 crore from FMPs in November and December respectively.
• Another reason, as cited by the market players, is the desire of the fund houses to retain investors who are investing in FMPs. Typically, such funds are for the period of more than three years so that investors get the indexation benefit. Returns in these schemes are also predictable.

However, few schemes launched are for tenure of three-months to one year. The idea here is to lock-in the higher rates on debt securities. Officials in the industry say that with the current elevated yield levels, some of the debt securities maturing in three months are yielding around 7.25 per cent. While six months papers are yielding around 7.60 per cent.

"From a short-term perspective, FMPs make sense compared to liquid funds or short duration funds. In FMPs the yields are higher and one can lock-in the rates as we might see reversal of interest rates in the months to come," said a senior fund manager.

Few years ago, FMPs were one of the important categories among debt funds. But issues like DHFL defaults and Essel group's loans shares debacle led to a downfall of FMPs in the industry.

But soon, the industry got another alternative for FMPs - the target-maturity funds.

Like FMPs, target-maturity funds also invest according to the tenure of the scheme. These funds are open-end in nature and investors can move out of the scheme before it matures.

Since FMPs were closed-end, it was difficult for the investors to exit those schemes. Although they were listed on the exchanges, they were quite illiquid.

What should you do?
Even though the high yields of FMPs make them attractive right now, investors should still prefer target-maturity funds. Why? Because target-maturity funds are liquid - investors can get their money out quickly if they need to. That's not always the case with FMPs.

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