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

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?

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

Sebi 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

Close ended funds including FMPs are to be held till maturity

New 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?

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