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Journalism of Courage
The Indian mutual fund industry,which until October 2008 was riding high on the bull run in equities,was halted in its track by the global liquidity crisis. Almost all mutual fund schemes came under redemption pressure,but Fixed Maturity Plans FMPs were hit particularly hard. In 2008 many FMP new fund offers NFOs had been launched,taking advantage of regulatory loopholes. But once the crisis struck,these very loopholes indicative yields,unregulated portfolio declarations,and average maturity mismatch resulted in a systemic breakdown for FMPs as investors withdrew money from them. Finally,the Securities and Exchange Board of India Sebi had to intervene. It opened a special lending window for mutual funds and later followed up with stricter guidelines for FMPs.
Impact of Sebi regulations
The new Sebi regulations initially had a crippling impact on FMPs. FMPs were major contributors to the industrys total assets under management AUM. But investments in FMPs started dwindling after the new regulations took effect as institutional investors stayed away.
On the positive side,listing of FMP schemes on exchanges rid fund managers of liquidity-related worries caused by sudden and large redemptions. With monthly portfolio declarations being made mandatory,there was greater transparency. The ceiling on allocation to a particular company led to more diversified portfolios. Exposure to risky real-estate and non-banking finance companies was curtailed. And finally,with disclosure of indicative yields being banned,there was less pressure on fund managers to invest in riskier securities in order to produce outsized returns.
New FMP era
With the passage of time,fund managers have learnt to live with the new regulations. In fact,FMPs appear to have been rejuvenated. Between February and April 2009,40 NFOs of FMPs were launched which cumulatively mopped up Rs 6,000 crore from the market. This strong showing helped FMPs find their feet again.
Benefits of FMPs
FMPs are an attractive option in the current market scenario. Why? Debt instruments,which were favoured by investors for their extra returns over fixed deposits,have lost their sheen in the current volatile conditions. Returns from liquid funds and liquid plus funds have dipped to around 3-4 per cent and 5-5.5 per cent respectively after Sebi restricted them from investing in securities having maturity greater than three months. FMPs,by contrast,are exhibiting a lot of promise.
Besides,FMPs also offer investors tax benefits. Investors can avail of double-indexation benefit to improve their post-tax returns. For example,an FMP launched in February 2010 and having a tenure of 15 months can avail of double-indexation benefit for fiscal years 2010-11 and 2011-12.
Strong performance
In the past,FMPs caught investors attention as most funds beat their indicative yields as promised. It is assumed that since FMPs mostly invest in debt and debt-equivalent securities,their returns would range from 8-10 per cent. However,this is not the case. The top 10 mark-to-market MTM gains among FMPs see table range from 15 per cent to as high as 72.2 per cent. The MTM returns are mainly on account of the decline in interest rates,which has resulted in an increase in bond prices. Even the annualised returns of some of the schemes are startling. Schemes such as ICICI Prudential S.M.A.R.T.s Series F,Series G and Series H have given annualised returns of more than 30 per cent.
Had investors been allowed to exit,as they could till December 2008,many would have preferred to take these gains even if it meant paying an exit load. But the lack of trading volume on the stock exchanges prevents them from doing so.
Since the central government and the central bank are likely to withdraw the monetary and fiscal measures provided during the crisis period,interest rates are likely to move up in the coming months. Since this will lead to a decline in the value of debt papers,returns are likely to be more moderate in future.
FMPs were pulled out of the morass by stricter Sebi regulations and improved market sentiments. They are now once again looked upon by investors as an attractive investment avenue that offers attractive returns along with tax benefits. But remember,if you want to reap maximum benefits from FMPs,you must stay invested in them till maturity.
The author is chief executive officer,Rupeetalk.com
