Hardening interest rate scenario a blessing in disguise for FMPs

Mumbai, Jan 22 | Updated: Jan 23 2007, 05:30am hrs
The tight liquidity position has resulted in a further hardening of interest rates in the financial market. This is influencing market players, including retail investors and high networth individuals, to change their investment strategy.

Mutual fund industry sources said that investors are withdrawing their money from liquid funds and diverting them to fixed maturity plans (FMPs). This changing investment pattern has seen assets under management (AUMs) of FMPs going up from Rs 15,555 crore in December 2005 to Rs 52,000 crore in December 2006. The AUMs of the FMP segment has seen a steady rise from the level of Rs 37,712.19 crore in September to Rs 42,153.22 crore in October and Rs 46,631.75 crore in November 2006, sources said.

Sandesh Kirkere, CEO, Kotak Mutual Fund said, The cost of funds has gone up because of the tight liquidity position prevailing in the market.

Market players are now borrowing money from the Reserve Bank of India to meet their financial obligations. This situation is providing a good ground for the 90 days FMP to offer an attractive return to investors.

Encouraged by this trend, ING Vysya, Birla MF, Lotus MF and other fund houses have lined up scores of FMP issues. They have filed their prospectus with the Securities & Exchange Board of India for offering FMPs. There were 26 FMPs in September, 22 in October, 39 in November and 16 in December 2006, sources said.

Sameer Kamdar, country head, Mata Securities, said that the spike in interest rate yields has made the returns on FMPs more attractive in comparison to bank FDs. This trend is attracting even retail and high networth individuals to invest in FMPs, with both a short- and long-term horizon.