As Short-Term Yields Rise, Funds Sense Good Investor Appetite For FMPs

The spike in short-term rates due to tight money supply has given fund houses an opportunity to roll out fixed-term plans. Thanks to falling returns on money market instruments, fund managers are expecting fixed-term plans to attract short-to-medium-term investments from corporate houses and affluent investors. With short-term yields on commercial paper - corporate bond issuances - hovering between 7% and 8%, debt fund managers are hoping to keep gross portfolio returns of current schemes at 7-7.25%. While fund managers are not allowed to give indicative returns on fixed-term portfolios, the general consensus is that investors will pocket about 6.50-6.75% (post-deduction of expenses) at maturity.

Almost all mutual funds have launched fixed-term plans - also called fixed-maturity plans (FMPs) - of varying maturities to shore up overall assets under management, which have been falling for a while now. While fund houses, like Tata Mutual, HDFC, Reliance, Birla Sunlife, Religare, ICICI MF and UTI, have schemes with a maturity of about a year, Fortis Mutual, IDFC MF and DSP Blackrock have schemes with a tenure of about three months. Fund houses keep varying maturities to help investors park their money for different periods, depending on their requirement for capital. "Fixed-term plans become attractive when short-term rates move up. People or corporates, who have investible surpluses and have three months to oneyear investment horizon can invest in FMPs and earn high yields at maturity," said Alok Singh, head-fixed income, Fortis Mutual Fund.

Current (yield) levels are good to start investing in fixed-term funds, according to fund managers. Short-term rates are likely to hold steady in the near term as a result of weak liquidity and the ongoing borrowing by capitalhungry companies. Even if the rates go up in the coming days, investors can invest in tranches at different levels of rising yields. The base of FMP-investing in times of higher yields is to keep investing at every rise, in yields. At maturity, if interest rates are declining, investors can book capital gains as a result of bond prices moving up above the levels where the money was invested.

Fixed-term plans invest in debt securities and their returns are locked in at the start of the plan. This reduces interest rate risks by a good measure. On the flip side, being a held-to-maturity instrument, FMPs are not suitable for premature redemptions. Though these scheme are listed on exchanges, the trading volumes - of FMP units - are very low on the board. In such a scenario, investors will have to redeem their investments at loss. Fixed-term plans are for investors who can stay with scheme till maturity.

Source : http://epaper.timesofindia.com