Higher interest rates on bank fixed deposits (FD) are giving mutual fund fixed maturity plans (FMPs) a run for their money. FDs with one to three year maturities are giving nine per cent, which is higher returns than FMPs.
“The indicative yield from fund houses is just about nine per cent. It’s a risky parameter and so we have not been recommending these funds to retail investors,” said Hiren Dhakan, Associate Fund Manager, Bonanza Portfolio.
Erstwhile toast
FMPs were the toast of the MF industry about two years ago. They provided double indexation benefits to the investors as well as provided returns of about 10 per cent on an average.
Double indexation benefits indicate that these schemes can be invested prior to the end of one financial year and redeemed just after the beginning of the next, thereby, giving the investor the advantage of taking into consideration the inflation rate for both years to be adjusted for tax.
FMPs for shorter durations such as six-months get rolled over and re-invested. So an FMP investing in a one-year certificate of deposit (CD) with a 10.5 per cent yield would give half-yearly yield of 5.25 per cent. If the yields on the one-year CD were to fall to 8.90 per cent, then the half-yearly yields would be about 4.45 per cent bringing the total yield to 9.7 per cent, lower than the 10.5 per cent expected at the beginning of the tenure.
“FMPs for short-term periods like six-months will expire and investors then run a large re-investment risk,” said Maneesh Dangi, Co-Chief Investment Officer, Birla Sun Life Asset Management Company.
Leads in short-term too
Fund houses usually charge about 5-10 basis points as management fees for FMPs. According to regulation, for debt funds, fund houses are allowed to charge 25 basis points lower than that charged for equity funds (2.5 per cent). But in case of FMPs, expense ratio is much lower as it would otherwise eat into the yields.
FMPs are usually held to maturity and yield is dependent on the debt instrument selected for investment by the fund manager. They invest mainly in bank CDs and CPs and are available under 15-day, 3-month, 6-month and one-year options, some even with 3-year and 5-year options.
According to data from valueresearchonline.com, the six-month FMP is currently yielding anywhere between 2.3 and 6 per cent. Three-month FMPs are yielding between 1.8 and 3.2 per cent.
On the other hand, bank fixed deposits for the 6-month and 3-month period is seven per cent.
“Money-market rates have fallen significantly and is being mirrored by the FMPs. Investors are being advised to put money into dynamic bond funds and short-term income funds which are both yielding about 10 per cent,” said Mahhendra Kumar Jajoo, Executive Director, Chief Investment Officer — Fixed Income, Pramerica Asset Managers.
However, FMPs are still seeing inflows from the high networth individuals and the institutional investors.
sneha.p@thehindu.co.in