But fixed maturity plans are risky, and you need to stay put for the entire tenure
With interest rates beginning to inch upwards, fixed maturity plans (FMPs) are making a comeback. In the last couple of weeks, Investors who are looking to lock in their money for up to one year have been making enquiries. They have queries for even shorter duration FMPs — both three months and six months.
While it is a good time to start locking in funds for one year, don't invest the entire surplus. Wait for some more time because interest rates could rise further. Primarily, invest only if you can stay put for the entire tenure.
Meanwhile, fund houses are gung ho about these products. Axis Mutual Fund, for instance, has already launched four-five FMPs in the last two months.
Some of the ongoing schemes in the market are ICICI Prudential Fixed Maturity Plan-Series 53, Fidelity Fixed Maturity Plan-Series III Plan B and Reliance Fixed Horizon Fund-XV.
According to market sources, the annual rate of returns being offered are 7.7-8 per cent. For shorter tenures like three months, the rate is seven per cent. This is higher than the existing fixed deposit rates. For instance, State Bank of India is offering four per cent for 4690 days, 4.75 per cent for 91-180 days and six per cent for 181 days to less than one year.
But one must remember that investing in FMPs is risky, as fund houses invest in securities of companies that could default. Three years ago, they were a rage. Good returns, coupled with taxation benefits, had investors flocking to these products. What also made these lucrative was 'indicative portfolios' and 'indicative yields' that fund houses declared to investors at the very outset.
Things turned sour when investors realised that in some of the schemes, the money had been deployed in a single or very few companies. In some cases, the companies were different from the ones mentioned in the 'indicative portfolio'. Many schemes had high exposure to real estate companies. There were also reports of fund houses asking investors to roll over at a higher rate of return. All this led to heavy selling in FMPs in October 2008.
Consequently, the Securities and Exchange Board of India (Sebi) introduced stringent guidelines in January 2009.
Fund houses were not allowed to declare 'indicative yields' and 'indicative portfolios' any longer. While issuing the guidelines, Sebi said, "There is a general consensus that this practice should be prohibited as 'indicative portfolio' and 'indicative yield' may be misleading." In addition, all schemes now have to be listed at the stock exchanges.
The liquidity of these products came down substantially. By listing these at the exchanges, an exit route is provided. But in the absence of a secondary market, the units trade at a heavy discount.
The certainty in returns has increased now. Since investors can only exit at maturity (or at a discount at the exchange), a fund manager can construct the portfolio after taking a call on the entire tenure. If you are able to stay locked in for the specified period, there are umpteen benefits. First, post-tax returns are better than fixed deposits. Second, if you stay invested for over one year, say 13 months, there is a double indexation benefit. That is, if you had invested in a scheme in March 2010 maturing in May 2011, you will get inflation indexation benefits of 2009-10 and 2011-2012.
This is why financial experts feel investors must only put in that part of their portfolio in FMPs which they do not intend to touch for the entire lock-in period. Also, don't invest for more than a year. With capital gains guidelines in the direct taxes code still unclear, investors should not go overboard with long-term schemes.
