Many a times, we have seen actors returning to screen under popular demand of their fans. Particularly popular on television, this is a tried and tested method of enhancing the actor’s as well the show’s popularity. In quite a similar fashion – although not in a similar context – a mutual fund category is back by popular demand as well. The fund category that I am talking about is the Fixed Maturity Plans (FMP).
FMPs were once a highly dominant product, but seemed to be breathing their last breaths last year. Somehow, they survived and managed to revive themselves and since then, they have seen a surprisingly fast-paced recuperation. The primary reason behind the FMPs’ revival has been that they are a set of products that cater to a real need and hence, the market has found ways of producing it.
For a long time, such fixed term funds were used primarily by large corporates to park money. However, over time, even smaller companies and high net worth individuals began opting for FMPs. Particularly with bank fixed deposits (FD) returns going down, FMPs have started to make sense as the better alternative. The recent high number of offer documents for fixed term funds filled with Securities and Exchange Board of India (Sebi) – 12 in the first half of August – is enough vindication for this category’s growing market.
Apart from their well know tax efficiency, FMPs have a number of other benefits over bank deposits as well. FMPs are closed-end funds, hence limiting liquidity. Investments in FMPs can be done only during the new fund offer (NFO) period and funds can be redeemed only after completion of the fixed term. Furthermore, returns on FMPs are also predictable. Until last year, fund companies gave out an indicative yield, which has now been disallowed by Sebi. Yet, investors get enough clues about the kind of returns an FMP is likely to fetch.
The expected returns of an FMP can be foreseen to a certain extent because these funds invest in debt papers with the intent of holding them till they mature. This means that despite any fluctuation in interest rates and the resulting impact on the market value of the paper, the actual returns that will be earned can be known. The only problem an FMP can face is a debt becoming bad. While this is a real risk, there have been no major fallouts because of it as yet. There have been FMPs that had invested heavily in papers of shaky real estate companies, but the previous year’s crisis has taught fund managers the importance of constructing FMP portfolios carefully.
All said and done, despite its issues, FMPs deliver a lot, to both its investors as well as the companies that these funds invest in. And herein lays the second reason behind the revival of the FMPs. In India, there is no active bond market. Companies need to find actual investors to invest in their debt and they do that through FMPs. In effect, FMPs become debt brokers. The fact there India should have a highly liquid debt market wherein bonds can be sold and bought is another story. We don't have such a market but FMPs have become a unique solution for it. So be it the first reason or the second, it seems like FMPs might encounter hiccups, but are here to stay.
FMPs were once a highly dominant product, but seemed to be breathing their last breaths last year. Somehow, they survived and managed to revive themselves and since then, they have seen a surprisingly fast-paced recuperation. The primary reason behind the FMPs’ revival has been that they are a set of products that cater to a real need and hence, the market has found ways of producing it.
For a long time, such fixed term funds were used primarily by large corporates to park money. However, over time, even smaller companies and high net worth individuals began opting for FMPs. Particularly with bank fixed deposits (FD) returns going down, FMPs have started to make sense as the better alternative. The recent high number of offer documents for fixed term funds filled with Securities and Exchange Board of India (Sebi) – 12 in the first half of August – is enough vindication for this category’s growing market.
Apart from their well know tax efficiency, FMPs have a number of other benefits over bank deposits as well. FMPs are closed-end funds, hence limiting liquidity. Investments in FMPs can be done only during the new fund offer (NFO) period and funds can be redeemed only after completion of the fixed term. Furthermore, returns on FMPs are also predictable. Until last year, fund companies gave out an indicative yield, which has now been disallowed by Sebi. Yet, investors get enough clues about the kind of returns an FMP is likely to fetch.
The expected returns of an FMP can be foreseen to a certain extent because these funds invest in debt papers with the intent of holding them till they mature. This means that despite any fluctuation in interest rates and the resulting impact on the market value of the paper, the actual returns that will be earned can be known. The only problem an FMP can face is a debt becoming bad. While this is a real risk, there have been no major fallouts because of it as yet. There have been FMPs that had invested heavily in papers of shaky real estate companies, but the previous year’s crisis has taught fund managers the importance of constructing FMP portfolios carefully.
All said and done, despite its issues, FMPs deliver a lot, to both its investors as well as the companies that these funds invest in. And herein lays the second reason behind the revival of the FMPs. In India, there is no active bond market. Companies need to find actual investors to invest in their debt and they do that through FMPs. In effect, FMPs become debt brokers. The fact there India should have a highly liquid debt market wherein bonds can be sold and bought is another story. We don't have such a market but FMPs have become a unique solution for it. So be it the first reason or the second, it seems like FMPs might encounter hiccups, but are here to stay.
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