Fixed maturity plans (FMPs), which have dried up in the past few months, may be back in favour following a spike in short-term rates in the past two weeks.
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About 27 different FMP schemes are currently open for subscription, of which 17 have a tenure of one year and seven have maturities exceeding a year. However, most of these are part of an existing series of schemes rather than a new fund offering. In the last two months, only three fund houses have filed with Sebi to launch fresh FMPs. Between April and June this year, FMPs mopped up R8,029 crore compared with R14,447 crore garnered in the year-ago period.
?It is a good time for fund houses to launch FMPs at this juncture because of the high short-term rates,? said Dwijendra Srivastava, head, fixed income, Sundaram MF. ?Having said that, fund houses are currently finding it difficult to source paper in the market as there is a paucity of CD issuances from banks.? Srivastava expects issuances to pick up after RBI?s credit policy.
Industry observers said about a dozen fund houses, which already have an approval for their existing FMP series, may rush to issue FMPs once bank CDs return to the market. It takes about seven working days to launch an FMP if the approval is in place. Fund houses that don?t have the requisite Sebi approval, though, might have to wait for about a month.
Experts said it makes sense for investors to invest in FMPs at this point in time. ?Long-term rates have risen in the past two weeks, but short-term rates have risen even more. Investors looking to lock in at higher rates can consider investing in one-year FMPs and hold their investment till maturity,? said Dhruva Chatterji, senior investment consultant, Morningstar India.
Yields on 10-year government papers have risen about 100 basis points to 8.129% from 7.167% about two months ago. In the same period, rates for three-month and 12-month CDs have risen about 200 bps to 10-11% from 8-9%, said experts.
FMPs are closed-ended mutual fund debt schemes with a fixed maturity date and invest in corporate debt, government securities and money market instruments. As the securities are held to maturity, the final returns are not impacted even if the underlying investments in these plans fluctuate.
FMPs typically see a pick-up when interest rates are on an uptrend. That explains why FMPs garnered R1.31 lakh crore in FY12, a year when the repo rate rose by as much as 175 bps. In FY13, however, FMP mobilisation dipped 46% to R70,987 crore over the previous fiscal as the RBI cut the repo rate by 100 bps.
FMPs are treated as a debt fund. 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.