Moneycontrol
Last Updated : Mar 07, 2018 01:40 PM IST | Source: Moneycontrol.com

Fixed maturity plans back in vogue as bond yields on the rise

FMPs are a type of a debt fund that invests in securities that match the tenure of the scheme and following buy and hold till maturity

Himadri Buch @himadribuch

Fixed Maturity Plans or FMPs are back in the game in a big way with new fund offers from 10 mutual fund houses already on, and many more set for launch in the days to come.

Fund houses such as Reliance Mutual Fund, HDFC Mutual Fund, Aditya Birla Sun Life Mutual Fund, DSP BlackRock Mutual Fund, ICICI Prudential Mutual Fund, Kotak Mahindra Mutual Fund, IDFC Mutual Fund, Franklin Templeton Mutual Fund UTI Mutual Fund and DHFL Pramerica Mutual Fund have all launched FMPs with nearly 40-month tenures.

FMPs are a type of a debt fund investing in securities that match the tenure of the scheme and hold till maturity making them free from interest rate risks. In simple terms if an FMP has a 3-year lock-in period, the fund manager buys bond or debt paper maturing in or around 3 years and within these 3 years if bond yields rise or fall the returns of the FMP remains unaffected.

Mutual Fund managers say two factors have led to the increasing interest in FMPs; one is a rise in bond yields in the last one month leading to good post tax returns, and second is the profit booking in equity markets which has prompted equity investors to shift focus.

“Post the sharp rise in Indian equity market over the past few months, high networth individuals have booked profits in the equity market and are investing in FMPs,” said Mahendra Jajoo, Head-Fixed Income, Mirae Asset Mutual Fund.

Benchmark 10-year bond yields, which went all the way down to 6.2 percent post demonetisation, reversed course in the face of rising oil prices, threat of slippage in fiscal deficit and expected oversupply in bond markets owing to the announcement of the issuance of Rs 1.35 lakh crore bank recapitalisation bonds. Yields went through the roof and touched 7.5 percent.

India’s benchmark 10-year yield surged to 7.82 percent last week, the highest since February 2016.

Bond prices have an inverse relation with the yield. So, when bond prices fall, yields to maturity rise, and potential FMP returns go up which is why mutual funds are cashing on the opportunity by floating FMPs.

Asset managers also said as investor appetite increases, many more FMPs are likely to hit the market in the coming days.

MF industry is also flooded with FMPs during Feb and March as investors get the benefit of `double indexation’.  If held for more than three years, investors can generate much better post-tax returns than bank fixed deposits.

Indexation means taking in to account inflation from the time the investor purchased an asset to the time an investor sells it.  So, by indexing, investors can bring their cost of investment to the current value after factoring in inflation.

Post indexation, investors can earn a post tax return of 7-7.25 percent on these products which score over traditional debt products such as bank deposits, where post-tax return is 5 per cent.

So, double indexation benefit is, enjoying indexation benefit for 2 years when the investment is held for little more than 1 year.

For instance: If an investor, purchases FMP between January-March 2018 with maturity after April 2021, an investor will be eligible for four indexation benefits (for financial years 2017-2018, 2018-2019, 2019-2020 and 2020-2021). Indexation benefit is not allowed on interest income from fixed deposits.

Mutual fund advisors recommend investors to study the indicative investment pattern and quality of portfolio before investing in an fixed maturity plan.
First Published on Mar 7, 2018 01:40 pm
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