Column : Debt may yet be a good bet

Font Size

Print

Feedback

Email

Discuss

: At a time when retail investors in not just stocks but also equity mutual funds feel devastated, debt seems to be a good option. And fixed maturity plans—designed to provide steady returns in volatile markets by investing the moneys in rated debt instruments of companies—are a safe avenue to park short-term surpluses. But over-enthusiastic execution of such schemes by some fund houses is killing investor faith in this decent product.

A rat race for shoring up assets under management (AUM) ensured that every fund house aggressively marketed the FMPs. With equity markets in doldrums since the beginning of 2008, the number of such plans more than doubled in the last 12 months to 975 with a total corpus of Rs 1,02,133 crore, according to Value Research. Today, FMPs account for almost a fifth of the total Rs 5.29 lakh crore AUM of the industry. Initially, these plans were sold to companies and high net worth individuals, but now even retail investors have started investing.

FMPs cannot promise any returns, but all of them publicise an indicative yield. Though it is not necessary for funds to generate the suggested yield, most of them try their best—and, perhaps make not-so-prudent investments. There have been instances in the past of funds being unable to generate the returns suggested in the offer documents.

Normally, the yields are better than the interest rate on fixed deposits. Combined with the superior tax benefits, FMPs have over the last year-and-a-half emerged as a lucrative option for corporate treasuries and high net worth individuals to park short-term monies.

So long as inflows into such schemes continued, there was no problem since receipts from a new plan helped them redeem earlier plans. With companies facing liquidity problems and HNIs turning wary, their interest in FMP products waned, making some fund houses jittery about their ability to meet redemptions. Left with no option, they are now seeking special treatment from RBI and Sebi. Some approached RBI to open up the repo window by adding more instruments so that they can borrow overnight moneys to meet redemption pressures.

While the RBI must desist from doing so, the capital market regulator Sebi must seize this opportunity to come clean on laxity shown earlier.