Why are FMPs a big draw among investors today

The 90-day period between May 22 to August 21 will down in history as a period of extraordinary situation, says Himanshu Pandya - Senior VP Investments ICICI Prudential AMC. Despite the situation that triggered panic among investors, Pandya firmly believes those invested in fixed income products for the long term would not have lost money.

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He says fixed maturity plans, or FMPs, have gained a lot of attention in current times. Since FMPs are closed ended and held to maturity, the investor knows that these are the kinds of yields, which he will make for the product, and he will not have interest rate risk and he will not have mark-to-market (MTM) risk during the tenure of the product, he says. Besides, there is no risk of reinvestment, he adds. Below is the verbatim transcript of Himanshu Pandya's interview on CNBC-TV18 Q: You must have got a lot of panic stricken calls from your gilt investors after what happened over the last couple of days, what have you been telling them?
A: Certainly, we have been going through extraordinary situation in bond markets in the last 90 days. Legitimately, investors have been asking a lot of questions. But so far as people have stuck to the basics of investing into fixed income, I don’t think they would be having too many complaints.
If you pick May 22 to August 21 as the only time window to witness and draw conclusions out of them, fixed income investors have been slightly more edgy and panicky. However, these were extraordinary circumstances with extraordinary measures. I am sure that this will go down in future for a long period of time as an extraordinary situation.
If you have come for a good enough time horizon in any of the fixed income products, you would not have lost money. In fact, what we have been advising our investors is to take an opportunity out of this situation. The circumstance where bond yields corrected by almost 180 basis points (bps) in a timeframe of 90 days cannot last and yesterday and today are the evidence of that. The bounce back has been equally sharp. So we have constantly been telling our fixed income investors to take advantage of this opportunity and be clear that come and average it again if you are a long-term fixed income investor and you will not be disappointed. Q: What are you telling them now, for people who are in longer duration funds, if the yield gets close to 8 percent, does it make sense to just get out of positions which were built earlier or you want them to hold on despite the prospect of the yields remaining hard?
A: In that matter, our job is very simple. We at ICICI Prudential have a certain advise for every timeframe of investing that an investor has got. So if you have one year around timeframe of investing, we have a product. If you want three years timeframe investing, we have a product. So, if you are looking at an investment timeframe of three years and above, we continue to recommend ICICI Prudential Income Plan, which is a long-term bond fund. If your investment horizon is around two-three years, we continue to recommend ICICI Prudential Short-Term and Regular Savings Fund, which will do very well in this timeframe.
If the bond yields are at 8 percent, we do not think that is the situation because investment has to be made with the horizon in mind. So if you are coming with the two-three years timeframe, we will believe that even at 8 percent an investor should be doing well to come into duration product with two-three years average maturities.
_PAGEBREAK_ Q: How are the accrual plans doing because that is what attracted some capital over the last couple of months when the spike in the yield happened, is it a good vehicle to hold on to given where the kind of rates the investors might have locked themselves in?
A: In situations where yields have moved up, one of the very interesting window of opportunities that open for investor is the accrual based product. We have fixed maturity plans (FMPs), which are one of the most prominent accrual based products. So if you see the last 60-90 days, we have seen substantial interest from investors across different classes in fixed maturity plans because when you are talking about one-year, three-years and five-years kind of fixed maturity plan and offering it to investors, what you are doing is you are locking the investment portfolio at the higher yields that are available today.
Since FMPs are closed ended and Held till maturity, the investor knows that these are the kinds of yields, which he will make for the product, he will not have interest rate risk and he will not have mark-to-market (MTM) risk during the tenure of the product. Therefore, these products have drawn a lot of attention, we have seen a lot of inflows coming in fixed maturity plans because today a one-year fixed maturity plan can get into papers which have current yields in excess of around 10 percent, which is a very attractive deal.
Even for a two-three years fixed maturity plan, you can invest into two-three years papers today with current yields in the vicinity of 10-10.25 and these are good numbers for long-term investors because it avoids reinvestment risk also. Q: What about dynamic plans which can switch between maturities, do you have one at ICICI and if yes, would you have cut down duration in such portfolios?
A: When we talk about duration plans, we have three broad areas of duration plans simply depending on the horizon of the client, which is the short-term duration products, medium-term duration products and long-term duration products. We at ICICI Prudential have products in almost all categories. We have in medium-term as well as in long-term.
At this point in time, we are very fortunate because we would be taking full advantage of the kind of drops in the yields because we have for a good period of time maintained that in an economy which is slowing drastically, in an economy where inflation has come down, it is very difficult for policymaking to keep interest rates at a very high level for a long period of time.
So we have always maintained ourselves that in the long-term, which is two-three years, interest rates will come down and our portfolios have investors who have that kind of thinking therefore they are geared for these kind of maturities. So we have not drastically cut or increased our duration simply because of these intermittent movements because in any case they are hard to predict. What needs to be remembered is what the product is for, what is the duration and what is the advantage that it gives to investors. Q: Let me ask you about your take on 10-year yield now, do you think it is headed below 8 percent anytime soon?
A: Predicting the precise quotations can be very dicey but we firmly believe that there is no reason for yields to be at such high levels for a long period of time. We firmly believe that we have done one good thing, fiscal deficit has been brought under control and very sharply.
Within policymaking there are certain things which have been good and there are certain things which have not been good. We have been focusing too much on the things which are not good and too little on things which have done well. We believe that in this country, if you want to generate employment and investments need to be made without which growth will be very difficult, interest rates will have to come down. So we feel that in the short-term to medium-term, the yields may be around 8 percent plus or minus 20-25 bps, but in the long run, there are all the reasons for us to move towards much lower interest rates.