5 Reasons To Invest in FMP Fixed Maturity Plans Today

October 10, 2013 by · 2 Comments 

FMPs (Fixed Maturity Plans) are a good option, if you are an Indian, you are wondering where to invest in India today

FMP - 5 reasons to invest

Why consider FMPs or Fixed Maturity Plans :

  • The equity or share market has crashed
  • The debt market has crashed
  • Fixed deposits (FDs) have poor post tax returns
  • You fear the risk of default with corporate FDs
  • The solution : Invest in FMPs or Fixed Maturity Plans!

5 Reasons to invest in FMPs (Fixed Maturity Plans)

The equity market is a poor alternative to FMP investments today

The crash in the equity (share) market has all of us scared. Is there more pain in the market? Will it ever recover? Will interest rates ever decrease? The NIFTY is now heading towards 5000, FIIs are exiting. On top of these factors, there are rumours of a pending strike on Syria. The high cost of capital in India suggests that the economy will not revive soon and the equity share market will be in doldrums for some time. So, equities are out as an investment option. Even if they are up temporarily, the QE abandonement by the US Fed hangs like a damocles sword on the market. Fixed Maturity Plans are the option to consider.

FMP vs debt mutual funds : A no-brainer

Earlier in the year, as predictions of lower interest rates hit the market, everyone wanted to get into the debt market. However, after rumours started coming in of quantitative easing being eased out by the US Government, there has been a drastic pullout of FIIs from the debt market. This has led to debt funds or gilt funds not being an option anymore for Indian investors

FMPs Mutual Funds investments are less affected by FII impacts due to reducing QE- quantitative easing

Now, we come to FMPs or Fixed Maturity Plans. These are special debt NFOs (new fund offers) offered by mutual funds. However, whats unique about FMPs is that FMP Mutual Fund investments are for a specific duration. This ensures that the mutual fund managers can lock in to the high interest rates available now and the indicative yields are usually accurate. For example, if you buy a FMP fixed maturity plan mutual fund for 6 months, the mutual fund manager will typically invest in fixed income instruments of that known maturity. This essentially reduces interest rate risk significantly. As FMPs do not work like debt mutual funds, they are not affected by sudden withdrawls in the funds

FMPs, being illiquid, are actually an advantage during this time

FMPs (Fixed Maturity Plans) are supposedly liquid debt instruments per RBI and are traded in the debt market. But in reality, not much trading takes place in FMPs. This is actually an advantage in today’s debt market since fixed maturity plans are not subject to the fickle investment decisions of global FIIs. Debt mutual funds barring fixed maturity plans have totally collapsed, but FMP investments are still doing well

Fixed Maturity Plans (FMPs) have tax advantages over FDs and other investments through indexation

The tax advantages of FMPs over FDs is well documented. The indexation benefits of FMPs are great especially if the fixed maturity plans span across multiple years. This is a great advantage for Indian investors in the 20% or 30% tax brackets and helps them save a lot of tax

In summary, fixed maturity plans are the way to go these days, however, always watch the fine print!

While Fixed Maturity Plans may be preferred investment vehicles with mutual funds launching a new one every day, you have to make sure that you read the prospectus and invest in FMPs that invest in AAA or AA rated securities only and also look at the past performances of the individual mutual fund managers

Invest in FMPs (Fixed Maturity Plans) Now

January 11, 2013 by · Leave a Comment 

The right time to invest in FMPs – before interest rates fall

The best part of FMP Mutual Fund investment schemes is that fund managers are able to lock in high interest rates when the funds are launched. This is because in fixed maturity plans, the fund managers lock in the right mix of Govt Securities and corporate debt at the right maturities depending on the maturity of the FMP scheme

Interest rates are set to fall – lock in FMP investments now

The point in favour of FMP investments is that all indications from the RBI suggest that the RBI is set to cut interest rates now. This means that future FMP investments may not get you the same returns that an investment in fixed maturity plans will get you today.

Will interest rates really fall? That question is debatable and definitely depends on the trends in inflation, driven by commodity prices- which is not really in RBI’s control

If you believe in fixed maturity plan investments, this is definitely the right time.

FMPs also offer tax benefits in comparison to other investments

While it is a good time to lock in FD (fixed deposit) rates as well, FMPs score over FDs in terms of tax benefits.As a result, unless you need the high liquidity benefits offered by bank fixed deposits (FDs), fixed maturity plans are a better option at this point, especially if you fall into the tax brackets

Right Time To Invest In FMPs

October 20, 2012 by · 1 Comment 

Perfect time to invest in FMP Fixed Maturity Plan NFOs from mutual funds

right time for FMPs

Investing in any mutual fund NFO is fraught with risk these days- is there a ray of hope in investing in fixed maturity plans? Yes! FMP New Fund Offers from Indian mutual funds are a good option for investments these days

Why can one consider FMP (fixed maturity plan) investments at this time? Why now?

Consider the current stock market and interest rate scenario

  • Stock markets at an intermediate high, with the sensex at around 18000 and stock markets likely to fall.
  • Interest rates are a high and the rates are set to fall soon. So, its a perfect time to lock into these high rates
  • FMPs are better than bank fixed deposits in terms of tax treatment for HNIs and retail investors
  • Fixed Maturity Plans from mutual funds offer the opportunity to buy a basket of fixed maturity debt securities,rather than a single corporate fixed deposit
  • Longer term FMP investments offer great tax benefits with prospects for single and double indexation tax benefits
  • With falling food inflation, it is likely that interest rates will fall soon. The RBI and the Indian Government are also giving similar messages leading to a possible fall in interest rates. Its the right time to lock into these higher rates
  • SEBI has tightened the governance of fixed maturity plans by Indian mutual funds by mandating that FMPs be traded in the stock market. Also, the fact sheet published by Indian mutual funds have ensured that if you can study the past performance as well as the expense ratios of FMP NFOs. This has led to more transparency in FMP investments.

In short, this is the right time to invest in FMP mutual funds- Invest soon before the opportunity window for fixed maturity plans disappear

Fixed Maturity Plans (FMP) revival in India 2009? A Phoenix rises from the ashes

July 3, 2009 by · 3 Comments 

Fixed Maturity Plans ( FMP ) in India have seen a huge revival in 2009

Fixed Maturity Plans almost led to the dismantling of the entire Indian mutual fund system, as FMP MF managers invested in risky assets such as real estate company (read : Fraud) fixed deposits. The RBI stepped in to clean up the mess with key regulations and Fixed Maturity Plans were supposed be history

Fixed Maturity Plans,however, have risen like a Phoenix from the ashes as the first five months of 2009 have seen investments in new Mutual Fund FMP IPOs of almost 6000 crore!

FMP (Fixed Maturity Plan) mutual Funds have benefited from Government regulations

FMP Fixed Maturity Plan MFs have matured as an investment vehicle in 2009. The Government imposed strict regulations on investments by FMP Mutual Funds have seen greater transparency in Fixed Maturity Plan investments that mature high networth investors (HNI) has appreciated

The quality of investments by Fixed Maturity Plan (FMP) mutual funds has also improved, as the new FMP IPOs of 2009 have desisted from investments in risky assets such as real estate company fixed deposits and NBFC investments

Just the fact that new FMP Fixed Maturity Plans have not invested in the volatile real estate company fixed deposits is enough to give potential FMP investors some confidence in FMPs as an asset class. The recessionary environment had earlier given credence to the belief that FMP Fixed Maturity Plan portfolios were in deep trouble due to the imminent collapse of real estate companies

Liquidity concerns in Fixed Maturity Plans (FMPs) has not impacted popularity of FMPs

RBI had ensured that Fixed Maturity Plans in India could not be sold before maturity and that FMPs could be freely tradeable in the market. However, given the low trades for bonds in the Indian market, FMPs or Fixed Maturity Plans are hardly traded,giving FMPs very low liquidity

However, this low liquidity of FMPs or Fixed Maturity Plans hardly seem to have affected their popularity as every new FMP is being lapped up by the market immediately. HNIs or High Networth Individuals still continue to believe in FMPs ( Fixed Maturity Plans ) as a great investment option for its obvious tax benefits

SEBI ‘s Fixed Maturity Plan (FMP) regulations controversial?

December 17, 2008 by · Leave a Comment 

Is SEBI ‘s solution to the Fixed Maturity Plan problems against the interests of investors?

sebi fmp regulationsSebi has recently announced a slew of regulatory measures to resolve the Fixed Maturity Plan induced Mutual Fund liquidity problem.

Given the run on FMPs and the resulting liquidity pressures on the Mutual Fund industry due to Fixed Maturity Plan scheme withdrawls, SEBI first offered a line of credit to the mutual fund industry

SEBI has also banned early withdrawls in new fixed maturity plans (FMPs). Now, investors in Fixed Maturity Plans cannot withdraw and liquidate their fixed maturity plan funds. So, even if investors want to get out of new FMPs at the cost of the high exit penalties, SEBI has ensured that the investors have almost no option but to wait till the fixed maturity plans finally mature, rather than getting an early redemption

Arguably, SEBI ‘s new regulation regarding Fixed Maturity Plan schemes will prevent FMP schemes and MFs from suffering from similar liquidity problems again and going bust, but SEBI has probably delivered a solution that principally benefits Mutual Funds – even those mutual funds with badly managed FMP schemes

SEBI has offered compulsory trading of fixed maturity plans in the stock exchanges as a sop to investors

Given that most of SEBI ‘s solutions to the liquidity problems of mutual funds seem to be focused on safeguarding the mutual fund industry rather than the investors, SEBI has introduced one small sop to investors in close-ended instruments such as fixed maturity plans

SEBI ‘s sop relates to compulsory trading of close-ended fund securities such as FMPs (fixed maturity plans) on the BSE,NSE stock exchanges. However, FMP investors may find that though the Fixed Maturity Plan schemes can be potentially liquidated in the stock market, these FMP schemes may end up be illiquid and not traded much in the markets

SEBI should realize that if a mutual fund does mismanage its FMP (fixed maturity plan) portfolio, investors in the FMP fund may not find many suckers who are willing to take the bad FMP debt paper from their hands at a reasonable price

In summary, SEBI seems to have made decisions regarding FMPs that are heavily loaded in favor of Mutual funds at the expense of investors

SEBI ‘s recent guidelines are great news for Mutual funds , but has SEBI done a good job of their primary role- safeguarding the interests of investors?

Closed ended funds such as FMPs have early withdrawl banned by SEBI

December 5, 2008 by · Leave a Comment 

Close ended funds including FMPs are to be held till maturity

close ended fundsNew SEBI norms will bar close ended funds such as FMPs, otherwise known as fixed maturity plans,from allowing investors to withdraw their money before maturity>

Going forward, corporates and retail investors will be allowed to liquidate their closed ended funds only at the time of maturity

Close ended funds such as FMPs have come under SEBI scrutiny following the liquidity crunch that Mutual funds have faced recently

The recent panic premature withdrawl from close ended funds such as FMPs due to doubts about their asset quality of the portfolios of the close ended funds, had caused a major crisis in the mutual fund industry. Due to the liquidation pressure on close ended funds,RBI had to step in and offer a credit line of Rs 60000 crore to commercial banks in order to lend to the crisis ridden mutual fund industry

Close ended funds such as fixed maturity plans (FMPs) typically had a penalty to prevent early withdrawl but that obviously was not good enough

Close ended funds now will no longer offer a high penalty for early exit – in fact close ended funds will become almost illiquid since close ended funds such as FMPs cannot be redeemed before maturity. This will ensure that the close ended funds are not subject to panic selling, leading to a huge liquidity crisis for mutual funds

Exiting close ended funds to be possible only through the stock exchange

Close ended funds such as FMPs will now be forced to list on the stock exchange. These close ended funds can be exited only through the stock exchange , and not through investors demanding early withdrawl from the mutual funds

New norms on close ended funds such as fixed maturity plans to also ensure control on underlying assets

Close ended funds such as FMPs , can now hold underlying debt portfolios. who maturity will not exceed the maturity of the close ended fund itself. This will prevent short term close ended funds from holding debt assets that have longer maturities and exposed to higher level of credit risk

These new norms on close ended funds and fixed maturity plans to be applicable on all new close ended funds that are approved but not yet launched

All new close ended fund IPOs from mutual funds will have to follow the new norms for early withdrawl, as issued by SEBI. This will ensure that close ended funds such as fixed maturity plans are now finally under the radar of SEBI as SEBI tries to solve the liquidity risk to the mutual fund industry

Close ended funds may lose their current popularity due to SEBI’s recent norms, leading to more illiquid FMPs

As a result of SEBI’s norms, close ended funds may lose their popular status and it could be some time before investors and corporates start dumping all their money in FMPs again

The close ended FMP vs FD battle now may temporarily be won by bank fixed deposits as some HNIs may be reluctant to invest in close ended funds such as FMPs due to liquidity concerns

Are Fixed Maturity Plans (FMPs) a risky investment in today’s market?

October 24, 2008 by · 1 Comment 

FMPs are risky investments?

Are Fixed Maturity Plans (FMPs) risky in today’s market?

Are Fixed Maturity Plans safe from the onslaught of the credit crunch disaster that has lead to turmoil in world markets?

In an environment where every financial investment vehicle, be it individual shares in companies, mutual funds,corporate debt and even bank deposits is now being questioned as a risky investment, can fixed maturity plans be far behind?

Fixed Maturity Plans (FMPs) have seen some redemptions by corporates in the recent past

Fixed Maturity Plans have recently seen some heavy redemptions by companies, despite the 1-2% penalty for redemption prior to the maturity date.

There are two reasons for this early redemption of FMPs by corporates

  • The first reason for early Fixed Maturity plan redemption is the liquidity situation that some corporates are facing leading to defaults in corporate debt. As a result, some companies,especially in the real estate sector, are redeeming FMPs much prior to the maturity date and incurring some penalties due to early withdrawl
  • The other reason for Fixed Maturity Plan redemption is largely panic! At a time, when some people are wary of even investments in public sector banks, can they trust FMPs? Some people are of the view today that the only safe investment is cash!

So, are Fixed Maturity Plans safe in this current scenario?

My personal opinion is that FMPs are reasonably safe as long as you invest in a good fund ,managed by professional managers. You may do well to check the offer document to ensure that the fixed maturity plans invest in largely Government securities and AAA corporate debt

In summary, investing in FMPs may not give the same high post tax returns as in the past due to the falling interest rates and credit crunch, but fixed maturity plans are still an important investment vehicle to consider in the current market scenario