Monday, April 2, 2012

FMP mania grips investors.

It's the season of fixed maturity plans (FMPs). Mutual fund houses launched as many as 149 FMPs in March, as investors rushed to lock themselves into high interest rates and also take advantage of the double-indexation benefits provided by this product. Uncertain and volatile equity markets also contributed to demand for these fixed income products, mutual fund executives said.

FMPs are close-ended funds with a fixed tenure and invest in a portfolio of debt products, whose maturity coincides with the maturity of the product. The primary objective of an FMP is to generate income while protecting the capital, by investing in debt and money market securities.

The fourth quarter of FY12 was robust in terms of FMP launches. During the period, the domestic fund industry launched 313 FMPs. According to data from fund tracking firm Value Research, there is a rise of 30 per cent in FMP launches in March this year compared with the same period last year.

“Prevailing rates are very attractive. Investors have a feeling that they may not get such high rates for long and hence such a good demand for FMPs,” said Jaideep Bhattacharya, chief marketing officer of UTI Mutual Fund. Currently, FMPs are offering as high as 10-11 per cent, in many cases better than bank fixed deposits.

In the last few weeks of the financial year, there’s been a mad rush to invest in FMPs. This is thanks to the availability of the benefits of double indexation for those who stay invested in these instruments for a little over a year. That is, those who invest this March in an FMP which matures after 13-14 months, will get the benefits of both FY12 and FY13.

Since inflation has been high throughout the year, the inflation index, too, will be high for this financial year. As a result, when investors redeem the FMPs next year in April or later, they will get handsome indexation benefits. This will reduce their tax burden substantially.

“By entering during such times, investors avail the double indexation benefits,” said Sanjay Sachdev, chief executive officer of Tata Mutual Fund. “Investors have a clear preference for fixed income products and the trend has been visible for quite some time now. People are parking their funds in FMPs to benefit from the high interest rates,” he added.

Since the investments made during the last few days of the fiscal spill over into a financial year that represents a two-year holding period, though the actual holding tenure is just over a year, investors can avail of indexation benefits, say officials.

Industry executives say institutional investors had always been fond of such products. Now, there is a large participation from retail investors, too.

“Investors are wary of volatile equities and they are waiting for an appropriate time to enter. But for the time being, they are showing preference for fixed income products,” said UTI MF’s Bhattacharya.

However, industry executives do not see continuation of large number of launches in the coming months as interest rates are expected to come down.

Source: http://www.business-standard.com/india/news/fmp-mania-grips-investors/469780/

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