 Fear interest rate risk? Here is the solutionPublished on Fri, Jul 07, 2006 at 11:27 | Source : Moneycontrol.com Updated at Tue, Apr 17, 2007 at 14:17 Like this story, share it with millions of investors on M3
What is an FMP? FMPs stands for Fixed Maturity Plan. These are essentially close-ended income schemes with a fixed maturity date i.e. that run for a fixed period of time. This period could range from fifteen days to as long as two years or more. For instance, in a FD, when the period comes to an end, the scheme matures, and your money is paid back to you. Just like an income scheme, FMPs invest in fixed income instruments i.e. bonds, government securities, money market instruments etc. The tenure of these instruments depend on the tenure of the scheme. The need for FMPs Traditional income funds carry a risk known as "interest rate risk". Interest rates and prices of fixed income instruments share an inverse relationship. In other words, when the overall interest rates in the economy rise, the prices of fixed income earning instruments fall and vice versa. Adjusting the portfolio to the market rate of returns is called 'Mark to market'. In simple words, when interest rates in an economy rise, the NAV of an income fund falls and vice versa. FMPs effectively eliminate this interest rate risk. This is done by employing a specific investment strategy. FMPs invest in instruments that mature at the same time their schemes come to an end. So a 90-day FMP will invest in instruments that mature within 90 days. Holding the underlying instruments up to their maturity effectively mitigates the interest rate risk as there is no buying and selling of the instrument needed. However, note that though the return is more or less certain for the fund manager, these are not assured return schemes. The returns could be at best indicative. Liquidity Most MF schemes return your money within 5 days. However, the structure of a FMP does not lend itself to this kind of liquidity. Invest money you are more or less sure you will not need during the tenure of the plan. You can only withdraw the money during pre-set time periods. It is not an open-ended fund that allows you to exit (sell your units) whenever you want. Further, as the scheme opens for subscription, the tenure (whether 15 days, 30 days, 180 days etc.) is declared. So investments may be made for a suitable tenure. If money is urgently needed, most FMPs will charge you a steep exit load. Do check the load structure before investing. The reason for this steep load is to deter investors treating the FMP like a normal income scheme. As already mentioned, though income schemes invest in similar instruments as an FMP, being open-ended and not having a specific tenure based investment strategy, these are subject to interest rate risk. The tax impact... contd on Page 2...
PREVIOUS STORY Trending NewsBusiness News
|
News Rel Comm Q4 Cons Net Revenue Up 5% At `5,310 Cr (QoQ)  The latest earning numbers FIRST on CNBC-TV18
Videos
Interviews
 May 27 2012, 11:52 | Source: CNBC-TV18  May 27 2012, 11:00 | Source: CNBC-TV18  Subscribe to Moneycontrol Newsletters |
|||||||
With the stock markets gyrating up and down, many investors may prefer to wait out the storm and re-enter when the going gets smooth again. Meanwhile, there is need for a temporary parking place for funds where capital is guaranteed and the return is reasonable. At the same time, there should be ample liquidity as the money could be needed anytime when there is a buying opportunity. FMPs offered by mutual funds are the apt solution for such a need. 
