Why FMP returns in 2012 and 2013 have made FMPs the preferred debt fund investment in 2013
|FMP returns in 2012 have been really good- in many cases, the returns from FMP investments have beaten debt fund benchmarks. No wonder that FMPs form the highest category of mutual fund NFOs in 2012 and 2013|
I myself invested in a 370 day FMP last year and this FMP has given returns of over 12% in 2012. These returns are obviously better than most investment in debt mutual funds in 2012
Investors in FMPs NFOs in 2012 need to thank SEBI for the excellent returns that most FMP mutual fund NFOs have returned
SEBI came up with far reaching reforms in FMP NFOs launched by Indian mutual funds and this has led to more transparency and reduced risks in FMP investment returns.
The delay/abandonement of the Direct Tax Code has resulted in continued tax benefits for FMP investments and higher post-tax returns.
The tax benefits of FMP returns due to the FMP tax treatment advantages and related single and double indexation benefits have resulted in superior FMP post-tax returns in 2012 and 2013
We are all aware of the supaerior returns of FMPs vs FDs, purely due to the indexation benefits of FMP investments.
Have you ever wondered why returns from FMP investments do better than comparable debt fund investments?
It is really not all surprising that FMP returns do better than FDs, but FMPs often do better than debt fund / fixed income investments such as income debt funds, floating rate funds and other debt funds. This is because FMPs enable the mutual fund to lock into higher interest rates since there is less chance of withdrawl despite being listed. In a falling interest rate scenario, this enables mutual fund managers to lock into higher interest rates. In addition, investors in FMPs get the benefits of better post tax returns due to indexation benefits.
Fixed Maturity Plans (FMP Mutual Funds) are the rage in the mutual fund NFO market
Just some time back, FMP new fund offers had virtually vanished. After the debacle in FMP mutual funds last year, fixed maturity plans had been shunned by high individuals (HNIs), retail and institutional investors in India
Fixed Maturity Plans (or FMP mutual funds) new fund offers have returned in huge numbers
New Fixed Maturity Plans (FMP new fund offers) have been launched by ICICI Prudential Mutual Fund, HDFC Mutual Fund, Fortis Investments, JM Financial and Tata Mutual Fund in the last month. Per sources, the response to these FMP MFs (fixed maturity plan mutual funds) has been excellent from institutional, corporate and retail investors
Recently launched FMP MFs (fixed maturity plan mutual fund offers) may offer lower returns than last year but the returns will be more secure
New FMP MF NFOs will probably offer lower return than the fixed maturity plans offered by mutual funds last year, but there is really no estimated return. However, the recent SEBI regulations regarding FMP Mutual Funds have ensured that the investments in fixed maturity plans are more secure. There seems to be little chance of the disaster that almost hit mutual funds that dealt with FMP products last year
Revived interest in FMP Fixed Maturity Plan New Fund Offers by India Mutual Funds – SEBI deserves a major portion of the credit
SEBI definitely took steps in the right direction with regulations to rein in rampant FMP NFOs that invested in risky debt portfolios in the search of the elusive higher yields. With SEBI ‘s new reforms, there are strict restrictions and disclosures needed from MFs in India launching Fixed Maturity Plan (FMP) new fund offers (NFOs).
Are FMP Fixed Maturity Plans from Indian Mutual Funds such as ICICI Prudential, HDFC,Fortis & Tata Mutual Fund liquid anymore?
Liquidity in FMP Fixed Maturity Plan Mutual Funds? Absolutely not! Though SEBI insists on having the FMP listed on the exchanges as a debt fund, not too many trades are taking place in FMP funds.
However, liquidity is not the only criteria for FMP investors- the improvement in the quality of investments by FMP MFs has drawn retail, institutional investors back to Fixed Maturity Plans
Fixed maturity plans ( FMP mutual funds ) losing popularity with institutional investors in India
Fixed maturity plans , popularly known asFMP mutual funds, seem to be currently out of favor with institutional investors. The number of new FMP mutual funds launched in India has been dwindling since we had the scare with the perceived liquidity crisis in the mutual fund industry in India.
In fact,a check of new IPO open issues in India, suggests that almost no new FMP mutual fund IPOs (Fixed Maturity Plan IPOs) have been launched this month
The new SEBI regulations on fixed maturity plans could have had an impact on the launch of new FMP IPO s in India
The strict regulations that SEBI introduced for new FMP mutual fund IPO launches may have had an impact on the launch of new fixed maturity plans. One of the requirements from SEBI was to have to have compulsory listing of FMP mutual funds in India, and some mutual funds may be in the process of getting their infrastructure in place in order to comply with SEBI norms
In summary, fewer FMP mutual funds (fixed maturity plans) are being launched by Indian mutual funds, but it is not clear whether this is due to the newer SEBI FMP regulations or a temporary blip in confidence in fixed maturity plans
Close-Ended Funds SEBI order: Fixed Maturity Plans ( FMPs ) and other close-ended funds have to be listed in BSE/NSE
Mutual Fund managers have to ensure that all close-ended fund schemes such as Fixed Maturity Plan schemes ( FMPs ) have to get their schemes listed on NSE/BSE today
Per SEBI, the only close-ended fund schemes that are excluded from this SEBI dictat are equity linked saving schemes
SEBI is taking the right steps to ensure liquidity problems looming in Mutual Funds due to withdrawls from FMPs (fixed maturity plans) is tackled soon
Liquidity problems in MFs is leading SEBI to take strong decisions regarding close-ended funds such as fixed maturity plans. Transparency and tradeability have been the key problems with close-ended funds such as FMPs- Sebi is doing the right thing by addressing both these issues.
However, some investors will probably suggest that SEBI is acting rather late and putting these measures earlier could have prevented the panic withdrawls from close-ended funds such as FMPs and the corresponding liquidity scare in the entire Indian mutual fund industry
Compulsory listing of close-ended funds such as FMPs in exchanges and stopping early withdrawls from fixed maturity plans is a good idea
SEBI has also ensured that early withdrawls from close-ended funds such as FMPs is a thing of the past (with or without minor exit load penalties). This will further ease the liquidity scare in the mutual fund industry
ICICI Prudential MF FMPs have been given a superior AAAF rating by Crisil
Crisil , the credit rating agency has given a high rating to ICICI Prudential Mutual Fund’s FMPs. This fantastic rating for 35 of ICICI Prudential Mutual Fund FMP schemes is a huge boost for ICICI Prudential FMPs and fixed maturity plan schemes in general
The high rating for ICICI Prudential Mutual Fund’s FMPs indicates that the “credit risk” for these fixed maturity plans is limited
Recently, fingers have been pointed at FMPs for investing their assets in risky debt portfolios, including real estate companies and NBFCs. It looks like ICICI Prudential Mutual Fund’s FMP managers deserve a pat on the back for being conservative in their debt portfolios, leading to a lower credit risk
ICICI Prudential MF FMPs also score high in transparency
By publishing a regular fact sheet indicating their portfolios, ICICI Prudential MF FMPs have also demonstrated a high degree of commitment to transparency in their FMP portfolio investments
Crisil giving ICICI Prudential Mutual Fund a high rating for it FMPs is a short in the arm for the reputation of ICICI Prudential as a mutual fund house
FMP schemes from mutual fund houses have come under great scrutiny in the recent past and allegations of poor portfolio allocation and exposure to credit risk have been made against mutual fund houses in general
In this context, by giving ICICI Prudential FMPs a high rating, for over 35 FMPs, Crisil seems to be suggesting that ICICI Prudential is one of the better managed mutual funds with enough checks and balances in place
Short Term FMPs are now getting more popular than longer term FMPs among corporates
Corporates are now preferring to invest in short term FMPs, showing a marked disinclination to invest in longer term fixed maturity plans
Corporates are playing it safe by investing in FMPs with shorter durations of typically less than 3 months
FMPs are still an important part of the Indian corporates’ investment plans
Recent fears about Fixed Maturity Plans have not dimmed the preference of corporates to invest in FMPs possibly drawn by the superior tax benefits of FMPs compared to FDs
However, corporates are now more careful about longer term FMPs , given the recent liquidity scare that mutual funds faced in October this year
Possibly, the easing of liquidity in November has led to corporates continuing their investments in FMPs
FMPs , at least of the shorter term duration, are the flavour of the month, probably due to the easing of liquidity in Mutual Funds and a gradual return of confidence to at least the FMPs of the better managed mutual funds
In summary, FMPs are back in the short term investment portfolio of corporates
Surendra Bhave,SEBI Chairman, makes positive statement about FMPs (fixed maturity plans)
Asked a question about FMPs, and the possible risks and fears of FMP investors, Surendra Bhave,SEBI Chairman, suggested that asset quality of most fixed maturity plans were good, since 90% of FMP assets were rated AAA or A1+
The risks of FMP schemes now seem limited to liquidity concerns due to massive withdrawls from certain FMP schemes by HNIs
SB Bhave, SEBI Chairman, however, cautioned investors that any mutual fund investment had a risk element
SB Bhave, reminded investors that people who wanted to play safe and avoid risk should invest in Fixed Deposits of banks and shouldnt even be looking at equity or mutual funds which carried a risk
Reading between the lines, FMPs seem to be a better footing now , with even the liquidity problem easing in
FMP and mutual fund investors should a little easier from SB Bhave’s statement- it suggests that any problems due to poor fixed maturity plan asset quality should now be limited to select mutual fund houses that were not careful in allocating FMP portfolios
Of course, investors may be worried if “their” Fixed maturity plan scheme is one of those FMPs with bad portfolio allocations
Those investors who are still worried about their FMP investments are better off reading mutual fund fact sheets that detail the Fixed Maturity Plan portfolios that the mutual fund has invested in
FMP assets of select Mutual Fund houses are being redeemed in a massive way by corporates
Some FMP funds are currently facing a huge redemption of assets. The redemption of FMPs even at the cost of the penalties for early redemptions of around 2-3% has led to some FMP funds becoming almost illiquid
FMP redemptions : The key reasons for investors closing out fixed maturity plans before their maturity
Select Fixed Maturity Plans have seen redemptions due to the following key reasons
- The current liquidity crunch is seeing corporates withdraw their FMP holding even at the cost of the high penalties for early withdrawl of FMPs (often the penalties range from 1-2%)
- Investors in Fixed Maturity Plans have panicked on rumors that certain Mutual Fund houses have invested FMP assets in risky corporate debt in sectors such as real estate. Since many industry watchers expect the real estate industry to tank, in the midst of the current recession, investments in real estate debt by FMPs could be eroded by corporate debt defaults
FMPs have been the mainstay of some Mutual fund houses and the redemption of FMPs could lead to huge crisis in some Mutual Funds and possible distress sales
In recent times, Mutual Funds have been depending on FMPs to increase their asset base. Some small Mutual Fund houses even went overboard, by depending almost wholly on Fixed Maturity Plans for their assets
As a result of the recent spate of FMP redemptions, some small mutual funds which have non-diversified assets, could face a liquidity crisis and could also go in for distress sales of assets ,which could at times even include the entire Mutual fund House
In summary, most Mutual Funds may not have issues due to the recent spate of FMP redemptions but some select Mutual Funds could be in trouble
FMPs (Fixed Maturity Plans) to be regulated, SEBI decides to control FMP investments in realty, NBFCs
Based on the recent FMP redemptions in the market, SEBI has conducted a research on FMP (fixed Maturity Plan) portfolio and concluded that there is significant exposure of FMPs to “volatile” sectors such as realty and NBFCs. Rumors of such low quality FMP paper and the credit crunch have recently led to large scale FMP redemptions by corporates
SEBI’s proposed dictat on FMP (fixed maturity plan) portfolios may hopefully calm the fears of corporates and HNIs who have invested large amounts of money in FMPs
SEBI actions on FMP portfolios will hopefully save the FMP asset class from being a pariah in the market
Fixed Maturity Plans (FMP) have been recently more popular even compared to bank FDs, and had been winning the FMP vs Bank FD competition for debt,but it looks like FMPs are now in deep trouble as an asset class
FMPs constitute almost 25% of assets of the Mutual fund industry and these SEBI actions are in the right spirit to safeguard the mutual fund industry. The recent redemptions in FMPs (fixed maturity plans) are quite scary and it is possible that FMPs as an asset class will disappear unless the SEBI takes stringent action against FMPs.
FMP portfolio disclosure is another area of concern and hopefully the SEBI will act on that aspect of FMPs as well
Fixed maturity plans (FMPs) do not disclose their asset portfolios to their investors,unlike asset classes such as equity or diversified funds. This aspect of FMPs has led to fund managers , typically in small funds, going beserk on FMP investments, including issuing debt to the “volatile” real estate sector
FMP investments in “real estate” constitute the biggest risk
FMP investments in real estate obviously are the biggest risk- as the real estate sector is poised to be disastrously affected by the recent downturn. Real estate companies also are heavily leveraged since they assumed that the bull market and the price escalation of real estate would last for ever
SEBI may also end the FMP “early exit” option
Despite the early exit penalty in FMPs , FMPs (fixed maturity plans) have seen large scale redemptions in recent months. SEBI may come up with a recommendation to reduce the temptation for large scale redemptions of FMPs soon.
In summary, FMP (fixed maturity plan) regulation by SEBI is a step in the right direction
Crisil has asked for better disclosure of FMP (fixed maturity plan) portfolios by mutual funds
Given the recent crisis of confidence in FMPs (fixed maturity plans) among some investors, Crisil has suggested that domestic mutual funds should provide more transparent disclosure of FMP portfolios
Ideally, FMPs , with the high percentage of Government debt and AAA debt portfolios should be safe
The reason most of us invest in instruments such as Fixed Maturity Plans (FMPs) is that we think debt is absolutely safe!. In fact, most FMP offer documents suggest that the majority of investment of these fixed maturity plans is supposed to be only in high quality paper such as Government securities, AA and AAA debt.
However, rumors persist in the market that the FMP (fixed maturity plan)investment vehicle may have been abused by some mutual fund companies by investing in risky debt in areas such as real estate
Highly leveraged companies in sectors such as real estate are expected to struggle with the impending recession, consumer confidence crisis and credit crunch and there is certainly some risk of corporate debt default, leading to redemptions in select fixed maturity plans (FMPs)
FMPs (fixed maturity plans) are still a great place to invest, if one relies entirely on the offer documents
A senior executive of CRISIL says “85% of FMP portfolios are investment in AAA and P1+ rated securities”. Given this rather assuring outlook, Fixed Maturity Plans do look safer compared to other investment alternatives, despite the smaller sample size of the CRISIL study
CRISIL is right, more disclosures in Fixed Maturity Plan (FMP) portfolios is necessary for investor confidence
The better of the Fixed Maturity Plan fund managers have only to gain by disclosing their portfolios in a transparent manner , akin to open ended funds. Since it appears from the CRISIL study, that most of the Fixed Maturity Plan fund managers have been disciplined investors, it makes sense for FMPs have more transparency