Fixed Maturity Plans (FMPs) out of favor with institutional investors?

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

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?