Capital market regulator, SEBI, is set to stop early or premature withdrawals by investors in Fixed Maturity Plans (FMPs) to be launched from now on.
The recent rush by large corporate investors in FMPs to redeem their investments, which resulted in considerable pressure on fund houses, has forced SEBI to review its norms relating to this product.
The regulator has decided not to allow early withdrawals in new FMP offerings and to make it mandatory for new FMPs to be listed on exchanges, according to a person familiar with the issue. The aim is to prevent large scale premature redemption in a product, which is marketed as a fixed maturity plan.
Over the course of the past 12 months, FMPs had emerged as one of the most popular products offered by fund houses. Where it scored over fixed deposits was in terms of higher yields and post-tax returns, which helped draw in a lot of corporate money.
On an average, this scheme offers a return of well over 12% with the corpus being invested in corporate and securitised papers, certificates of deposit and commercial paper. The most common FMPs vary in maturities from 3-6 and 13 months.
An early or premature exit for an investor in these schemes would be through the secondary market, unlike the scenario now where an investor can redeem investments before maturity by paying the exit load. Mutual fund industry managers say the regulator has stopped approving new filings for FMPs until the changes are incorporated. They are now waiting for the regulator to amend the regulations soon.
Effectively, changes underway could signal that new FMPs will be truly be close-ended schemes, which could be traded like an exchange-traded fund. "The product is called a fixed maturity plan and the investor buys into it knowing the features of the product. People have to come into it with a clear idea that they have to stay in for the maturity. If they want to exit, they should be able to find a buyer in the secondary market after an FMP gets listed," said a person familiar with the proposed changes.
At the end of September '08, the corpus of FMPs aggregated Rs 132,000 crore out of the assets under management of the Indian mutual fund industry of Rs 5,32,000 crore, a share of 25%. The effective tax for a long-term investor in such schemes work out to 22% while the short-term tax is 16.5%.
The corpus would have shrunk considering that many corporates have pulled out money, given their concerns relating to the credit quality of some of the investments made by fund houses in some of the FMPs.
The recent rush by large corporate investors in FMPs to redeem their investments, which resulted in considerable pressure on fund houses, has forced SEBI to review its norms relating to this product.
The regulator has decided not to allow early withdrawals in new FMP offerings and to make it mandatory for new FMPs to be listed on exchanges, according to a person familiar with the issue. The aim is to prevent large scale premature redemption in a product, which is marketed as a fixed maturity plan.
Over the course of the past 12 months, FMPs had emerged as one of the most popular products offered by fund houses. Where it scored over fixed deposits was in terms of higher yields and post-tax returns, which helped draw in a lot of corporate money.
On an average, this scheme offers a return of well over 12% with the corpus being invested in corporate and securitised papers, certificates of deposit and commercial paper. The most common FMPs vary in maturities from 3-6 and 13 months.
An early or premature exit for an investor in these schemes would be through the secondary market, unlike the scenario now where an investor can redeem investments before maturity by paying the exit load. Mutual fund industry managers say the regulator has stopped approving new filings for FMPs until the changes are incorporated. They are now waiting for the regulator to amend the regulations soon.
Effectively, changes underway could signal that new FMPs will be truly be close-ended schemes, which could be traded like an exchange-traded fund. "The product is called a fixed maturity plan and the investor buys into it knowing the features of the product. People have to come into it with a clear idea that they have to stay in for the maturity. If they want to exit, they should be able to find a buyer in the secondary market after an FMP gets listed," said a person familiar with the proposed changes.
At the end of September '08, the corpus of FMPs aggregated Rs 132,000 crore out of the assets under management of the Indian mutual fund industry of Rs 5,32,000 crore, a share of 25%. The effective tax for a long-term investor in such schemes work out to 22% while the short-term tax is 16.5%.
The corpus would have shrunk considering that many corporates have pulled out money, given their concerns relating to the credit quality of some of the investments made by fund houses in some of the FMPs.
Source:http://economictimes.indiatimes.comSEBI_to_ban_early_redemption_in_new_FMPs/articleshow/3635064.cms
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