On the other hand, the turmoil in the bond market, with several of the regular bond schemes even showing negative returns, some of the jittery investors have been taking money off the table.
The recent volatility in the debt market has seen a rush for launching fixed maturity plans (FMPs) by fund houses. On the one hand, given the recent spike in rates of interest in the economy, these schemes have become attractive to investors, and hence the rush. On the other hand, the turmoil in the bond market, with several of the regular bond schemes even showing negative returns, some of the jittery investors have been taking money off the table. To keep these investors within the same fund house, mutual funds have been launching FMPs in large numbers.
But why are FMPs the flavor of the season? An FMP is a closed-ended debt fund where the time to maturity of the debt instruments in its portfolio matches exactly with the maturity of the whole scheme. For example, if a fund launches an FMP for 367 days, meaning an investor investing in this fund will get his money back after 367 days, then all the debt instruments like certificates of deposit (CDs) and commercial papers (CPs) it has in its portfolio, will also mature after 367 days.
So there is no mismatch between the portfolio of an FMP and the time of maturity of the fund. Now since the CDs and CPs come with pre-defined rates of interest, so this aspect also gives the investor a very good idea about the kind of return he/she can expect by investing in the FMP. This return is not guaranteed but fund houses only 'indicate' the magnitude of return they can offer in each FMP they launch. I market parlance, this is called indicative yield. Of late, some of the FMPs from better fund houses are offering indicative yields of 9.80% or even closer to 10%. So what kind of investors should look at investing in FMPs? Those investors who want to have part of their investments in debt instruments, and have some money that they would not require at least for the next one year. However, "any emergency corpus should be kept in a bank fixed deposit", said Mukund Seshadri, partner, MSVentures Financial Planners. This is because FMPs, although are compulsorily listed on the bourses, offer nearly no liquidity.
But why are FMPs the flavor of the season? An FMP is a closed-ended debt fund where the time to maturity of the debt instruments in its portfolio matches exactly with the maturity of the whole scheme. For example, if a fund launches an FMP for 367 days, meaning an investor investing in this fund will get his money back after 367 days, then all the debt instruments like certificates of deposit (CDs) and commercial papers (CPs) it has in its portfolio, will also mature after 367 days.
So there is no mismatch between the portfolio of an FMP and the time of maturity of the fund. Now since the CDs and CPs come with pre-defined rates of interest, so this aspect also gives the investor a very good idea about the kind of return he/she can expect by investing in the FMP. This return is not guaranteed but fund houses only 'indicate' the magnitude of return they can offer in each FMP they launch. I market parlance, this is called indicative yield. Of late, some of the FMPs from better fund houses are offering indicative yields of 9.80% or even closer to 10%. So what kind of investors should look at investing in FMPs? Those investors who want to have part of their investments in debt instruments, and have some money that they would not require at least for the next one year. However, "any emergency corpus should be kept in a bank fixed deposit", said Mukund Seshadri, partner, MSVentures Financial Planners. This is because FMPs, although are compulsorily listed on the bourses, offer nearly no liquidity.
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