Strategy for investing in fixed maturity plans

Fixed Maturity Plans (FMPs) have been extremely popular in the past, but they have undergone a change in the last one-year.

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This has led to a different situation for quite sometime though there is now increased activity in this area. It is necessary to see whether there are adequate benefits present for the investor under the new offerings and hence there has to be a clear strategy framed in this area.

Fixed Maturity Plan

A FMP is a close-ended debt scheme that comes to an end on a particular date. This means that the scheme will complete its operation on the day specified at the time of the launch of the scheme. At this point the investments will be sold and the available value will be distributed among the investors of the scheme.

All about infrastructure funds

The initial period of the offer is open for a short period of time and this is the only time during which the investor can invest their money into the scheme. Under the new guidelines, investors cannot exit midway in such schemes by selling their units to the mutual fund, but these would be listed on the stock exchanges.

Change in situation

There were several problems in the FMP route in the last year as the rush to sell the units created liquidity problems for several mutual funds. After that the market regulator Securities and Exchange Board of India (SEBI) has ensured that the conditions for these schemes have been made strict so that the interest of the investors is protected.

How 'exit loads' affect your MF investments

This requires a different approach for the purpose of tackling the entire situation. All this led to a situation where there is a lower interest from investors and due to this reason there is a situation where there are also limited offerings that were present in the market.

One of the major changes that have been witnessed with respect to the FMPs is that these do not give an indicative yield for the investor. This means that the earlier system of looking at the indicative yield for the purpose of making investment is now no longer present. At the same time there is also no indicative portfolio given by the fund. Also a lot of the FMP that are being introduced in the market now are coming in for a longer time duration, so this is also a factor that impacts the manner in which the investment takes place.

Analysis of top funds

The question before the investor now is to see whether there has to be an investment and what should be the areas of consideration in this decision.

Investor action

The investor is concerned with the returns that they will get along with their ability to ensure that their targets are met. In such a condition, they have to look at the features of the scheme more closely to get an idea about what they are actually receiving.

Fund management style has implications for investors

On this front at the current moment there will be some tough times as far as the investor is concerned because the interest rates are ruling quite low. The yields on the instruments in the secondary market have dropped. This results in a situation where the investor will find that the expected returns that they will be getting on the FMP are not very high.

This is the first thing that will have to be faced and while this might not be very attractive in the immediate term one has to look out for the features over a longer time period as rising inflation might push rates higher in the coming months.

How MF investors can avoid entry load

The other thing is that liquidity and the manner of operation of the scheme regarding listing and other things have to be considered. The conditions might not be very conducive for those who want to suddenly get out of the investment and hence this will be more suitable for all those who are sure about the time period of the investment that they are ready to make.

There is also the factor that a lot of the new offerings that are coming into the market are long term in nature. Earlier there were a host of options that were present ranging from 30 days to stretching quite long but quite a few of the new offerings are for a period like 12-18 months.

There are tax benefits in the form of a lower capital gains tax rate when the holding is for a period of more than one year and in this situation the investor would have to look at the situation carefully in making their scheme selection.

Factor resulting in gains for debt funds

This also means looking at the situation where there is a need to ensure that they have a longer term need that will match with the time period for which the offering is available. Once this is done then there would be a smooth way in which the investment would take place.

Investors should be selective in their investments so there is no repeat of the situation witnessed when the crisis came about. A clear strategy, if available, would ensure that there is no confusion on the part of the investor about the exact form of action that needs to be taken in the issue.

Arnav Pandya is a Chartered Accountant and a management graduate from IIM Bangalore with a specialisation in Finance. He is also a Certified Financial Planner with experience of over a decade in the field of personal finance.

The views expressed in the article are the author's and not of Sify.com.

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