Fixed maturity plans or FMPs have seen a 12 per cent hike in their assets under management in the last two months. The AUM of FMPs in June 2018 was Rs 1,00,970 crore. It grew to Rs 1,09,315.89 crore in July, and to Rs 1,13,832 crore at the end of August. Mutual fund advisors believe that investors are lapping up FMPs because of the troubles in the debt market. The market is spooked by liquidity issues, downgrades and rising interest rates.
“FMPs have been an attractive instrument for a long time but lack of liquidity has been their problem. Investors are probably showing more interest in them because of the defaults that happened recently in many debt funds after IL&FS. Also, rising interest rates have brought bad news for debt funds. FMPs are dealing with these issues better than the other debt mutual fund categories,” says Suresh Sadagopan, Founder, Ladder7 Financial Advisories.
Fixed Maturity Plans or FMPs are currently giving around 8.3-8.5 per cent annual returns and 7.5-7.8 per cent net returns in a year. This is more than any other debt mutual fund category. Mutual fund advisors believe that better post-tax returns are also making a strong case for FMPs at the moment.
However, investing in FMPs has some drawbacks, too. Most FMPs typically have a lock-in period of three years. So, investors do not have the luxury of withdrawing their money at any point, unlike other open-ended debt funds where investors can pull out money as and when the need arises. “Liquidity is a concern in FMPs but these schemes are only suited for investors who don’t have any short-term needs. If an investors has the time-horizon and the capability of holding the money for three years, then only it makes sense,” says Sadagopan.
Moreover, if you think that there are no defaults in FMPs, you are wrong. Advisors believe that many investors are going for FMPs thinking that they will be saved from downgrades, but that is a wrong notion. “FMPs also invest in lower-rated papers and there can be downgrades in them. Retail investors who are not well-aware of the ratings of the papers in the portfolio might end up being disappointed later in FMPs,” says Karthik Swaminathan, a certified financial planner based in Mumbai.
Suresh Sadagopan advises that investors should invest only in FMPs which have triple A rated papers in its portfolio. “We advise investors to not choose FMPs with lower rated papers in the portfolio. Also, downgrades are inevitable in debt schemes but FMPs can handle them better with their longer holding period and lock-in,” says Sadagopan.
Finally, you should invest in FMPs only if you can lock-in your money for the stipulated period. You should also have the risk-appetite to deal with downgrades, if any, because you won’t have an option to get out of the scheme before the lock-in period. Karthik Swaminathan believes that debt investors should stick to short-term funds and liquid schemes to stay safe from the downgrades and interest rate movements in the market.