INTEREST rates are on the upswing in the economy and investors need to be alert about the impact that this will have on their debt mutual fund investments.
One area that investors need to keep an eye out for is that of fixed maturity plans (FMPs) that are being launched by various mutual funds on a regular basis.
These are funds that have a specified maturity date and are close-ended in nature, so investors are aware about the life of the investment at the time of putting their money in it.
In this sense, it is vital that the investors have a clear strategy outlined to consider these funds and here are some features that will be helpful for them.
Popular periods: There are quite a few FMPs that are being launched by mutual fund houses in the market.
A look at several such offering gives a clear idea about the time period that is being chosen by the mutual fund houses for their funds. The time periods include 100 days, 180 days, 370 days and 15 month offerings as many fund houses have come out with these options. The investor has to understand that these will represent the exact time period for which their money will remain with the fund after which the fund will be terminated. The fund with a time period of 370 days ensures that it goes well above 12 months that qualifies it as a long-term capital asset which can be beneficial on the tax front.
Listing: The other important thing that an investor will experience when they are investing into such funds is that after the initial time period for the investment is over there will still be a liquidity option available for them.
Earlier, the investor could redeem the units with the fund by paying a penalty in the form of an exit load.
This is not possible in such funds, since it will not be redeemable till the end of the time period of the fund. To compensate for this, there will be a listing on the stock exchange that the fund will have to undertake and thus this opens up a window for the investor to get their money out.
However, in reality, the actual ability to transact will depend upon the number of transactions that take place. This will have to be witnessed as there are chances that even though there is a route it is not widely used.
Time period: There is also an initial time period for which the subscription is open for investment. This is where the investor has to be careful because they might not have a lot of time available for making the investment. This is especially true as in the case of many FMPs the fund keeps the investment open for only a few days -sometimes only for a couple of days -and hence the investor has to be quick in making the investment.
In some offerings there is a time period of around a week for which the subscription is possible so there is ample time that is available for investments.
No indicative yield: Now the mutual funds and the intermediaries who distribute the funds cannot show or tell investors about the indicative yield that the fund will actually earn.
Earlier, this practice was rampant and this is not possible now. But an investor who wants to have some idea about the kind of return that is being earned there is a way out which is to estimate the returns themselves. Since investors are not experts in the field, these calculations will be just estimates. Also there is no portfolio available for viewing as the funds will be invested only after the issue closes so this route is also not possible.