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

“90% of FMP assets were rated AAA or A1+”

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

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