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

High FMP redemptions by corporates leads to erosion in MF assets

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