The period between January and March typically sees an uptick in the launch of fixed maturity plans (FMPs). Mutual funds have mopped up a little over Rs 6,000 crore from such schemes between November and January, data from Association of Mutual Funds in India show.
FMPs are a fixed tenure mutual fund scheme, that invest their corpus in debt instruments maturing in line with the tenure of the schemes. The tenure of an FMP can vary between a few months to a few years and the scheme is ideal for those with a definite tenure in mind.
“FMPs are suitable for investors with a 1 to 3-year horizon given the current high interest rate environment. It would be ideal if investors can invest for a 3-year horizon as it takes care of the reinvestment risk and provides indexation benefit. FMPs have become relatively more safer after the credit issues faced by such schemes in 2019 and a number of regulatory changes that ensued,” said Dhaval Kapadia, director, portfolio specialist, for Morningstar Investment Adviser India.
According to experts, one-year FMPs can fetch 7.25%, while 3-year plans can offer about 7.5% at the prevailing rates.
FMPs do not carry interest rate risk but there is a chance of default in some securities if the credit profile of the scheme portfolio is poor.
FMPs have lost their sheen somewhat in the past few years after several mutual funds who had invested in papers of DHFL and Essel group held back payments to investors in 2019 and after the introduction of products such as target maturity funds (TMFs).
“FMPs can invest in slightly illiquid papers offering better yields given that it is a lock-in product unlike TMFs which need to necessarily invest in liquid debt instruments. Being open-ended, TMFs will offer better liquidity to investors, especially those looking to lock in at current yields for higher durations of 5-7 years,” said Kapadia.
TMFs help investors navigate the risks associated with debt funds better by aligning their portfolios with the maturity date of the fund. These are passive debt funds that track an underlying bond index. Unlike FMPs, TMFs are open-ended in nature and are offered either as target maturity debt index funds or target maturity bond ETFs. So, TMFs offer better liquidity than FMPs.
TMFs also offer a wider range of maturity options, ranging from 1 to 10 years, compared to most FMPs, which are typically in the 1-3 year range. So, FMPs may not be appropriate for investors with longer goal horizons.
“Both FMPs and TMPs are suited to manage interest rate risk through a buy-and-hold strategy because they have fixed maturities. TMPs, however, are better equipped to manage credit risk than FMPs because their portfolio includes G-secs, State Development Loans, and AAA-rated PSU Bonds, in addition to addressing interest rate risk,” said Abhishek Singhal, business head, passives & alternate strategy, Aditya Birla Sun Life AMC.
He added that although FMPs are close-ended funds and are listed on exchanges, their low transaction volumes prevent them from providing much liquidity. TMFs offer better liquidity because they are open-ended in nature.