With short-term rates turning attractive, fund houses have lined up short-term fixed maturity plans (FMPs) mainly to cater to institutional investors. In the last few days, DSP Black Rock MF, HDFC MF, Principal PNB MF have launched three-month FMPs, while Reliance MF, Religare MF and SBI MF are planning to come out with 90-day FMPs.
At the fag end of the previous financial year, fund houses had launched long term FMPs, typically above one year, to let investors avail of double indexation benefit. With yields of 3-month certificates of deposits (CDs) and commercial papers (CPs) going over 9% per annum recently, fund houses are cashing in on the opportunity by launching short-term FMPs.
FMPs usually invest in CDs and CPs. Currently, 3-month yields on CDs are around 9.2%, and on CPs are 9.65%. According to sources, indicative yields on a 3-month FMP is around 8-8.5% at current market levels.
Dwijendra Srivastava, head of fixed income at Sundaram Mutual Fund says, ?In the last few days we are witnessing a lot of issuance of papers from banks with many CDs maturing in June. Apart from that, short term rates have moved up by 15-20 basis points in the last few days. This is a good time to invest in short term FMPs.?
FMPs are closed-end debt schemes that come with a specific tenure, typically three months to a year. These schemes invest in debt securities that mature usually near the date of the scheme?s maturity. Around the maturity date, fund managers sell all the securities and pay back the money to its investors.
Mahendra Jajoo, ED and CIO, fixed income at Pramerica Mutual Fund says, ?It makes sense as three month rates are above 9% and mostly institutional investors are participating in short term FMPs.? He also added that, fund houses are investing more in CDs as there is not much credit risk involved
in CDs which are issued by banks.
FMPs are suitable for investors seeking low-risk avenues for a short investment horizon of up to 15 months. They are also more tax efficient compared with traditional fixed deposits. In the past few months there has been a lot of demand for FMPs with rise in interest rates in the economy.
According to the data from the Association of Mutual Funds in India (Amfi), FMPs had collected over R3,000 crore in the month of April with 22 schemes being launched during that period.
