With a spike in bond yields, investors are looking to reduce credit and interest rate risks. And to attract risk-averse investors, mutual fund companies are launching a host of fixed-maturity plans (FMPs).
In these volatile times, risk-averse investors are preferring closed-ended debt funds because of the higher interest rate and double-indexation benefit that FMPs offer. For fund houses, the investment objective of FMPs is to generate returns and protect the capital invested as the schemes invest in debt products with a fixed maturity. In fact, FMPs score better than bank deposits because of their tax efficiency. Also, FMPs have lower expense ratios compared with open-ended debt funds because the fund managers do not have to churn the portfolio, which, otherwise, adds to the costs for the investor.
In August, mutual fund houses launched a host of FMPs across tenures ranging from one month to over a year. UTI Mutual Fund announced a new fund offer (NFO) for UTI Fixed Term Income Fund- Series XVI- III for 368 days. The scheme is available for subscription from August 22 to August 28. Similarly, HDFC Mutual Fund announced the NFO of HDFC FMP Series for 370 days. The scheme will open and close for subscription on August 28. DSP BlackRock MF has launched two FMPs with maturity of three and 12 months.
Analysts say it is a good time to invest in FMPs as these are close-ended funds with a lock-in strategy and invest mostly in specified-duration instruments, such as company deposits and commercial papers where interest rate risks are much lower.
Dhawal Dalal, executive vice-president and head of fixed income, DSP BlackRock Investment Managers, says investors should take advantage of the recent spike in money market yields and consider investing in one-year FMPs and prefer quality and liquidity over credit and yield.
Following the liquidity-tightening measures taken by the RBI to strengthen the rupee, assets under under management of MFs in the debt fund category (liquid funds) fell by R45,296 crore, or 21%, to R1.29 lakh crore in July because of large-scale redemption. Bond yields and