[ 3 ]

I
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
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
In times of uncertain equity markets and low deposit
rates in banks, fixed maturity mutual funds are an
option worth considering
HOW TO CHOOSE
GOOD FMPs
[ 2 ]
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 post-
tax 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.
[ 3 ]
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.
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
FOR UNCERTAIN TIMES
^ upto November; * as on FY ending March 31
[ 4 ]
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 open-
ended 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
[ 5 ]
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 open-
ended 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.
[ 6 ]
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.
FAQs on FMPs
[ 7 ]
Upto One-year Over 1-yr upto 18 months Over 18 months
Above Avg Assets Above Avg Assets Above Avg Assets
Fund House Avg Funds Percentage (Rs cr) Avg Funds Percentage (Rs cr) Avg Funds Percentage (Rs cr)
SBI 24 42 285 21 33 225 0 0 225
DSP BlackRock 48 45 254 5 71 135 - - -
Birla Sun Life 20 63 247 47 54 290 1 100 290
Kotak Mahindra 5 63 234 44 65 203 4 50 203
IDFC 51 76 227 13 65 87 - - -
Reliance 17 52 204 49 61 269 8 57 269
Deutsche 1 20 185 18 51 128 - - -
Tata Mutual Fund 5 56 164 33 80 139 0 0 139
Religare Invesco 4 40 164 40 71 114 - - -
UTI 16 64 157 39 72 156 - - -
HDFC 27 42 145 39 50 176 2 50 176
BNP Paribas 12 80 145 11 52 134 1 50 134
JPMorgan 3 60 135 3 75 361 - - -
ICICI Prudential 6 75 122 48 62 274 10 59 274
Principal 8 89 107 4 57 37 - - -
Axis 6 86 103 9 90 78 - - -
L&T 11 44 95 14 61 56 2 100 56
Edelweiss 2 33 69 - - - - - -
LIC Nomura 1 25 66 2 50 47 - - -
IDBI 1 50 57 11 73 57 0 0 57
Baroda Pioneer 3 50 45 3 50 49 - - -
Taurus 9 56 44 10 77 33 - - -
Sundaram 0 0 36 30 56 65 2 33 65
Union KBC 0 0 34 - - - - - -
Daiwa 1 33 21 - - - - - -
JM Financial 3 100 19 7 100 45 - - -
BOI AXA - - - 0 0 14 - - -
Canara Robeco - - - 4 67 148 - - -
Escorts - - - 1 100 9 - - -
HSBC - - - 3 50 161 - - -
IIFL - - - 1 50 2 1 100 2
Indiabulls - - - 2 67 6 - - -
Pramerica - - - 1 100 31 - - -
THE FMP BOUQUET
[ 8 ]
The Value Research Star Ratings has for
long been the first step to fund selec-
tion. 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 evalu-
ate 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 indi-
cates the proportion of redeemed FMPs.
Methodology