The flip side to listing

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: Listing of fixed maturity plans may not end the recent woes of this class of debt mutual funds.

The huge redemption that Fixed Maturity Plans (FMPs) faced in October has renewed the debate on the structure of the product. The product invests in debt instruments whose maturity matches its own tenure. The idea is to buy and hold these debt instruments, and redeem them when the FMP matures, and pay out the proceeds to investors. An investor who holds the FMP until maturity benefits from the yield of the debt portfolio. However, fears about the quality of FMP portfolios, especially the real estate sector debt in some of them, triggered mass redemption pressure. This meant FMPs had to sell off their debt holdings before maturity, mostly at a loss. The secondary market for debt instruments is very illiquid, and a desperate FMP seeking to honour redemptions is unlikely to get fair value. The impact of this redemption has been on both who redeemed (at a loss and at a high exit load) and on those who chose not to redeem, as the NAV fell from the reduction in the value of the portfolio. There is a rightful demand for protecting the interests of those investors who stayed invested, but suffered a loss due to the actions of those who redeemed in panic. The only way this insulation can happen is by asking FMPs to list. This creates two problems. First, FMPs operate on very thin margins and are issued at high frequency. The listing fee will be high, and this will cut into the yield. Second, secondary market liquidity is likely to be low (the redemptions are more an act of panic than a regular need) which means that prices will not be efficient and will differ from the NAV of the product.