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In times of uncertain equity markets and low deposit rates in banks, fixed maturity mutual funds are an option worth considering
f you are like most Indian investors, a good part of your money is likely to be stored in bank fixed deposits. The penchant for Indians to save is reflected in the high sums of money that sit in our savings bank accounts because savers love the predictability of deposits. Take for instance the quantum of money in savings accounts or term deposit in scheduled commercial banks, which was Rs 11.21 trillion [3]

trillion as on March 31, 2013. The reason for such undying faith in bank savings is the safety and liquidity that the instrument offers. However, if you are a smart investor-as we believe all readers of this magazine are-you should seriously think of replacing most (or even all) of your FDs with Fixed Maturity Plans (FMPs) from mutual funds. From negligible market share accounting for less than 5 per cent of the Indian

mutual fund universe till 10 years ago, Fixed Maturity Plans (FMPs) are well on their way to becoming a major option for all kinds of investors. As on Sep. 2013, FMPs account for 23 per cent of the assets managed. Although, individual and small investors were slower to catch on to FMPs initially, their irresistible combination of higher returns and lower taxation have made them a logical alternative not just to other types of fixed income funds, but also bank fixed deposits.

The Logic Of FMPs

While there are some nuances to investing in FMPs that you will have to understand, the main argument for FMPs is very simple-higher returns with high safety . For those in the highest income tax bracket of 30 per cent, the effective posttax rate of return from fixed deposits in the last one year was 6.3 per cent. In

comparison, a typical FMP for the same period earned a return of 9.51 per cent. After adjusting the investment cost for inflation to calculate the indexation benefit, the returns from FMPs become tax-free as the rate of inflation is higher than the rate of return. For longer periods, this difference stacks up quite steeply . For instance, if you had deposited Rs 10 lakh in a three year fixed deposit on April 1, 2010, it would have swelled to Rs 12.07 lakh on April 1, 2013, taking into account the income tax liability . For the same period, a similar investment in an FMP would have earned Rs 12.59 lakh, which would be tax-free. When you look at these numbers, FMPs appear to be a no brainer. Why would you leave that extra money lying on the table for the banks and the taxman to pocket it? Of course, there's a catch. Rather, there are two catches. Neither of them are show stoppers, as the over Rs 1 lakh crore invested in FMPs show but you need to be aware of them before taking the plunge. [2]

The Liquidity Trap

Unlike bank fixed deposits, there is no practical way to get a premature redemption in an FMP, although on the face of it FMPs work much like a fixed deposit. You invest in an FMP that is launched for a fixed period of time. Generally, options range from 12 to 36 months. When the said period is over, the fund redeems your money with the returns. However, unlike a bank fixed deposit, the fund company has no option for an early redemption. Theoretically, all FMPs are listed on the stock markets and if you need your money early, you have the option to sell it to another investor. But that is easier said than done. In practice, volumes are thin to being non-existent and you probably will never be able to sell. For instance, since January 2013, FMPs were traded only on 20 days with just eight schemes changing hands on the BSE and nine on the NSE. [3]


^ upto November; * as on FY ending March 31

Even though the traded volume exceeded a few lakh for some schemes this year, historically, it has remained less than a few hundred a day . What is clear from this is that one should invest only that amount one is absolutely certain that will not be needed in the interim period.

Risk Involved
The other possible fly in the ointment is credit risk. Bank FDs have a very high degree of safety and FMPs cannot match

that. Like all mutual fund investments, FMPs carry market risk. The fund manager deploys FMP's assets in a range of fixed income assets and in theory, any of them could go bad and thereby lead to capital loss. In practice, such a loss has never happened. There are two sources of potential losses in fixed-income investments. One is a fall in the market price of the securities (bonds) that the fund has invested in. FMPs are immune to the first risk. FMPs are fixed-period instruments where the fund managers only invests in those bonds that are maturing just before the redemption date of the fund. Therefore, even if the market price of the bonds fluctuates in the interim, the final value realised is not affected. The other is credit risk, as in the bond issuer being unable to redeem the bond when it matures. Credit risk can be mitigated by the fund

managers doing their job of choosing the investments properly. In terms of the actual investments chosen, 82 per cent of the assets of FMPs are highly rated papers.

Making the choice

If you are convinced about FMPs, the next logical step is to select one to invest. Choosing an FMP is somewhat more tricky than choosing a normal openended fund, because unlike open-ended funds, you don't have any past performance or rating to go by. Moreover, depending on when you invest, you may not have a wide choice because you can only invest in those FMPs that are starting off with a timing that aligns with your needs. To make investing in FMPs an easy process, we have created the Value Research FMP Selection Framework which will help you in selecting an FMP to invest. The main point about this [4]

framework is that in the case of FMPs, you have to evaluate an AMC's past track record of running FMPs, in comparison with FMPs from other AMCs. Moreover, since interest rate conditions keep varying, this comparison can only be made between FMPs that started and ended at roughly the same time. Once you analyse the performance of FMPs by different AMCs (See FMP Bouquet) you can zero in on the scheme of your choice.

Post-2008 Repair
Before the 2008 financial crisis, FMPs were openended and exposed investors to higher risks with the lure of higher returns. Their popularity was largely on the higher returns that they posted in that period, which overlooked the

inherent risks. Sebi regulations in the aftermath of the 2008 crisis fixed these flaws and made FMPs safe and more transparent. FMPs were ensured to become closed-end, doing away with the open-ended treatment they followed before 2008. This way, it ensured that there was no payment crisis on count of mass exodus by investors which was witnessed from FMPs at the height of the 2008 crisis Fund managers now have to align the maturity of the underlying securities with that of the fund. This was in departure to the earlier scenario when FMPs were actively managed by fund managers, who took more market risks to earn higher returns. Now, investments are held till maturity.


FAQs on FMPs
When does the term of an FMP start, from the date of purchase or the date of closing of NFO? The term of an FMP starts from the date of allotment which can differ from the closing date of NFO. The allotment process is usually completed within 5 days of closure of NFO and the units are credited to investors' accounts. How do I redeem after maturity? You do not need to file a redemption request with the fund house at maturity of the scheme. AMCs are bound to transfer redemption proceeds within 10 days from the date of maturity. The amount you get will be determined by the scheme NAV on the redemption date. This amount will be automatically credited to your registered bank account if direct credit option is available with your bank or else redemption warrants will be issued to you. Do I need a demat account for redemption of FMP? You don't need a demat account to get the redemption proceeds. However, you need one if you want to trade the FMP on exchange before maturity. How are FMPs different from short-term funds? Liquidity is the biggest differentiating factor between the two funds. While FMPs are closed-end, short-term funds are open-ended, meaning you can enter or exit short-term funds any time. FMPs invest in instruments with same or lower maturity than the scheme. This means that regardless of change in interest rates, the returns that would be realised are known. Short-term funds, though, can invest in instruments with varying maturity, depending on the fund manager's outlook for interest rates. So if a short-term fund has invested in bonds with longer maturity it can suffer interest rate risk. I want to invest in current FMPs through secondary market. How do I go about this? All FMPs have to be compulsorily listed on exchange. If you are able to find a seller for the FMP you want to invest in, you can buy units of the scheme from the stock market like you buy an equity share. As explained earlier, it is highly unlikely that you will find sellers and therefore low liquidity. Where can I track currently open FMPs? Look at the current open FMPs at http://www.valueresearchonline.com /funds/fmpnfo.asp. It is classified in three groups, based on investment term.



Fund House Upto One-year Over 1-yr upto 18 months Over 18 months Above Avg Assets Above Avg Assets Above Avg Assets Avg Funds Percentage (Rs cr) Avg Funds Percentage (Rs cr) Avg Funds Percentage (Rs cr)

SBI DSP BlackRock Birla Sun Life Kotak Mahindra IDFC Reliance Deutsche Tata Mutual Fund Religare Invesco UTI HDFC BNP Paribas JPMorgan ICICI Prudential Principal Axis L&T Edelweiss LIC Nomura IDBI Baroda Pioneer Taurus Sundaram Union KBC Daiwa JM Financial BOI AXA Canara Robeco Escorts HSBC IIFL Indiabulls Pramerica

24 48 20 5 51 17 1 5 4 16 27 12 3 6 8 6 11 2 1 1 3 9 0 0 1 3 -

42 45 63 63 76 52 20 56 40 64 42 80 60 75 89 86 44 33 25 50 50 56 0 0 33 100 -

285 254 247 234 227 204 185 164 164 157 145 145 135 122 107 103 95 69 66 57 45 44 36 34 21 19 -

21 5 47 44 13 49 18 33 40 39 39 11 3 48 4 9 14 2 11 3 10 30 7 0 4 1 3 1 2 1

33 71 54 65 65 61 51 80 71 72 50 52 75 62 57 90 61 50 73 50 77 56 100 0 67 100 50 50 67 100

225 135 290 203 87 269 128 139 114 156 176 134 361 274 37 78 56 47 57 49 33 65 45 14 148 9 161 2 6 31

0 1 4 8 0 2 1 10 2 0 2 1 -

0 100 50 57 0 50 50 59 100 0 33 100 -

225 290 203 269 139 176 134 274 56 57 65 2 -


The Value Research Star Ratings has for long been the first step to fund selection. However, in case of FMPs, there is no such rating. This methodology addresses this shortcoming. The way our rating methodology works, we need a minimum 18-month track record to give a rating to any fixed income fund. Since investors can only invest in FMPs at launch, a rating given after 18 months would be useless. In any case, a majority of FMPs are launched for periods up to only 18 months. Therefore, we need a method by which our readers can evaluate FMPs which are yet to be launched. Here's how to begin: 1. Look at past performance of FMPs 2. Evaluate returns generated by the FMPs of an AMC compared to those from other FMPs 3. For a fair comparison, FMPs with same tenure operating at the same time should only be compared *Based on the time frames in which FMPs were redeemed, the tenures were divided into three categories: upto 1 year, over 1 year to 18 months and those with more than 18 months tenure. Average Assets: It is the average of the last available size of the FMPs of the fund house in each of three respective categories launched in the past three years **For each tenure, we calculated the average of all FMPs whose tenure ended in each month, and then compared each to this average. However, because the band of returns is narrow, we only see how many FMPs came in above average and how many below. For comparison we have annualised the returns of the FMPs with less than one year tenure ***These fund houses havn't launched FMPs since 2012: Franklin Templeton Mutual Fund, Goldman Sachs Mutual Fund, Morgan Stanley Mutual Fund, ING Mutual Fund, PineBridge Mutual Fund, Daiwa Mutual Fund, Mirae Asset Mutual Fund, Sahara Mutual Fund and Quantum Mutual Fund. The percentage under each tenure indicates the proportion of redeemed FMPs.