High networth individuals (HNIs) are preferring to put their money in fixed-maturity plans (FMPs) as higher yields are making the asset class more attractive than equities, which continue to be volatile.
According to market experts, while HNIs are still keeping away from equities, higher yields and tax benefits are drawing them to FMPs. ?The category gives indexation benefits to investors. The yields have also gone up recently, especially after the recent rate hike by the RBI,? said Srikanth Meenakshi, founder and CEO, FundsIndia.com.
RBI governor Raghuram Rajan hiked the repo rate by 25 bps in his mid-quarter policy review, which had an immediate impact on the yields with 10-year bond yields rising 39 bps to 8.58%. Similarly, yields on one-year AAA corporate bonds rose to 10.67% after the announcement compared to 10.42% the previous day.
?HNIs? appetite for FMPs can be gauged from the pace at which fund houses have rushed in with FMP launches,? said RK Gupta, MD, Taurus Asset Management.
Fund houses have launched 234 FMPs between July 1 and September 16. According to data from Value Research, the category average returns for FMPs in the last one-year period stood at 8.2%. FMPs have outperformed the equity market, which has delivered only 0.5% returns during the same period. India VIX, the volatility index for the equity market, also climbed 72.37% during this period.
Experts feel that even though the central bank has reduced the marginal standing facility (MSF) rate, which may bring down short term rates , FMPs are likely to remain popular as investors typically opt for one-year FMPs over shorter-duration FMPs. ?The short-term yields might come off, but RBI is expected to keep a hawkish stance on the long-term rates to address the inflationary pressures,? said Dhawal Dalal, head (fixed income), DSP BlackRock Investment Managers.
According to data from Association of Mutual Funds in India (Amfi), investments in FMPs in August surged 122% month-on-month to R20,000 crore and experts feel FMPs are likely to see further inflows when data for September is released.
