High FMP redemptions by corporates leads to erosion in MF assets

November 22, 2008 by · 2 Comments 

mutual funds and fmpsFMP 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