Mutual fund houses, which had flooded the market with fixed-maturity plans (FMPs) in August and September, have invested a bulk of the funds collected in certificate of deposits (CDs) issued by banks.
Industry estimates suggest about 80% of the R29,000 crore collected in the past two months has been parked in funds with a duration of one year or less. Even today, 24 FMP new fund offerings with tenure of one year or less are open for subscription as opposed to five FMPs with duration of more than a year.
A bulk of this money ? between 65% and 75% ? has been invested in bank CDs, while 25-30% is invested in NBFCs and housing finance companies, according to experts.
Meanwhile, FMPs of more than one-year duration, which typically invest in bonds and non-convertible debentures (NCDs) of corporates, are finding it tough to source long-tenure debt paper.
?There is some mismatch in the demand and supply of papers, especially of durations greater than a year, but the situation is not dire,? said Killol Pandya, senior fund manager, debt, LIC Nomura MF. Pandya attributed the decline in the supply of papers to the current economic slowdown, which is keeping corporates away from the debt market. According to experts, some corporates are also holding back issuing papers, anticipating a further decline in marginal standing facility (MSF) rates, which impacts the rates at which corporates can raise funds in the market.
?One-year and one-year plus non-convertible debenture (NCD) rates have come down after September 20. So, corporates are not issuing papers as they are waiting for rates to come down further,? said Dwijendra Srivastava, head, fixed income, Sundaram MF.
RBI governor Raghuram Rajan reduced the MSF rates by 75 bps to 9.5% on September 20. The central bank also indicated that it wanted reduce the spread between the MSF and repo rates, which could imply a further reduction in MSF rates.
Despite the dearth of long-dated papers, MFs are not compromising on the credit quality and sticking to AAA- and AA-rated papers, said industry observers. Within the NBFC space, FMPs are investing in reputed names such as Bajaj Capital, Tata Capital and Aditya Birla Finance. MFs are especially avoiding papers from real estate, telecom and airline companies, they said.
In August, mutual funds mobilised about R16,300 crore through 270 FMPs. Between January and August 2013, FMP collections amounted to about R80,553 crore compared to R82,456 crore in the same period last year, according to data from Value Research. While FMPs are likely to remain in vogue this month as well owing to the uncertain interest rate scenario, experts reckon the demand may taper off somewhat owing to the decline in yields. One-year CD rates, which had breached the 10% levels in July and were ruling at 10.8% at the end of August, have declined to about 9.5% levels at present.
FMPs are treated as debt funds. Short-term capital gains in a debt fund are taxed as per an individual?s applicable slab rates, while the tax for long-term capital gains is 10% without indexation or 20% with indexation, whichever is lower.
FMPs are closed-ended schemes and the securities invested in are held to maturity, meaning the final returns are not impacted even if the underlying investments in these plans fluctuate.