What to do if your fixed maturity scheme rolls over

Khyati Dharamsi

Pune-based graphic designer, Kartik R, invested in a fixed maturity scheme of HDFC Asset Management Co (HDFC FMP1148D) in February 2016. He wanted to save for his son’s school fee for financial year 2019-20. But he was in a setback when he got a letter from the fund house seeking his consent for a roll-over – essentially an extension of maturity – in the FMP.

He was perplexed. If he agreed for roll-over he would need to arrange for an alternative to pay his son’s fee. If he didn’t agree to roll over, his returns in the scheme would suffer a hit as one of the scheme’s underlying companies hadn’t paid back the funds given as loan from the scheme’s assets.

It’s not uncommon to see fixed maturity plans (FMPs) being rolled over, these days. HDFC AMC and Kotak Mahindra Asset Management have announced the roll over of schemes maturing around April-May 2019 by more than a year.

It gives you a feeling of déjà vu, doesn’t it? FMP roll-over requests, which were seen flying in during 2015 for taxation benefits (when the first Budget of the newly-elected government in May 2014 increased the threshold of long-term capital gains tax to three years from a year, earlier) are now being sent to investors citing a delay in recovering money and avoiding intermittent losses.

“To extend the maturities of Essel group exposures and allowing additional time to complete the strategic stake sale – this option offered a good chance of higher/complete recovery against debt exposures. Further, even if stake sale did not materialise, lenders felt that they were not worse off and will be in similar position as option 1, albeit with some delay. Thus, risk reward seemed clearly in favour of providing additional time to Essel group,” as mentioned by HDFC Mutual Fund in a letter to its investors dated April 15.

Earlier, Kotak Mutual Fund too had informed its investors to consider the option of roll over by 380 days to ensure that investments in Essel Group companies are recovered well. “We are working closely with the Essel group for optimal recovery from Konti & Edisons for the benefit of our unit-holders as we believe such recovery will take place albeit with some delay," Kotak AMC had earlier notified.

In fact, investors of Kotak FMP Series 127 and 183 have also been told that entire redemption amount would not be available for payment due to the exposure to Essel Group.

Many fund houses had lent to the Subhash-Chandra owned Essel Group. The money so borrowed was backed by shares of Essel group companies. But when the prices of these companies fell earlier this year in January on the back of the borrower’s financial concerns, some lender sold off their shares.

The group then persuaded the rest of the lenders to not to sell shares. Lenders - including most mutual funds - agreed to not to sell the shares of Essel Group companies until September 30, 2019, as bulk-selling would only lead to lower share price and loss to everyone.

While there are chances that by selling stake and through other means Essel Group might be able to pay back the money to various institutions including mutual funds, the sword of “if” is up there, over investors’ heads.

FMPs are closed-end debt funds of typically three years’ and five years’ tenures. They invest in scrips that mature just before the FMPs mature. Since these are closed-end, you cannot prematurely exit.

However, to provide liquidity, they get listed on stock exchanges where you get to sell at their market prices, though there is hardly any liquidity on the stock exchanges.

Typically, around its maturity, an FMP is supposed to sell its underlying securities, get the cash and pay off its investors. But when it looks difficult to sell its assets to get the cash, sometimes an FMP requests for a roll-over. An FMP also opts for a roll-over if the underlying interest rate regime changes- rates have peaked and a fall looks imminent- and it makes sense for the FMP to continue.

Should you opt for a rollover?

First things, first. Your fund houses will ask your permission before it rolls over the FMP. Even if you agree for a roll-over, doesn’t mean it gets rolled over. Only if it gets a minimum of Rs 20 crore assets (the value of investments that opt for a roll-over) and minimum 25 investors in a scheme, can a FMP get rolled over.

Check if you need the money now or can you wait a little longer. If you are in Kartik’s shoes, you either have to arrange for alternative funds or take whatever the fund has made so far and exit.

“Unit holders should stay put and accept the roll over, simply because the current value will consider assets exposed to Zee group as zero. If the investor has appetite to hold and not imagine too far in the future they should hold. Investments come with tail risk and unforeseen circumstances have activated this tail risk for one group. But giving time is critical as assets are available to liquidate. It’s just the timing that is not right currently,” recommends Vivek Rege, Founder & CEO, VR Wealth Advisors.

One should also align the portfolio with the right kind of investments for the goals at hand.

As Manish Mahesheka, founder Counton Advsiors, suggests, “One should avoid using instruments such as FMPs for their near-term goals such as school fees, rental deposits as FMPs are for 3-5 years horizon. Such funds needed in the short-term should be parked in liquid plus funds or even short-term FDs. But investors should understand that fixed deposits have their risk too as a single entity or a bank involved and one should choose wisely.”

You can opt against the roll-over, but if a majority of the schemes’ investors and corpus opts for a roll-over, the scheme does get rolled over. In which case, it does get rolled over, but you can still exit at the prevailing net asset value. The NAV would be lower, however, because of the under-recovery but you could still end making a profit over your initial investment.

As an FMP investor if you agree to roll over, you would have to offer a written consent letter – either attached with the notice or available on the website of the fund house. Send the same to the service centre of the fund house or the office of service providers such as CAMS or Karvy within the deadline.

Risk: You would have no control over the new maturity date of the FMP and the same can be extended further. “Debt environment may or may not worsen further, which can affect other securities in the portfolio. But this is a probability and should not be seen as certainty of events that would unfold in the future,” Rege adds.

Taxation: If you opt for the roll over, then it is not considered as a redemption from your scheme. It’s only when you exit the scheme (at the scheme’s actual winding up) when you will have to compute your long-term capital gains. Such withdrawals made after three years attract long-term capital gains tax of 20% (with indexation) on the gains once you receive.

Moneycontrol take

If you are an investor and faced with the option of roll-over, exit now if you need the money. If a planned expense is coming up for which you had earmarked this FMP, it doesn’t make sense in continuing. If you do not need the money right away and can wait till after the extension period, continue.

Senior citizens who had been regularly investing in FMPs would need to re-look at their strategy of investing in FMPs and debt funds. As the on-going crisis unfolds, many financial planners say that it’s always better to open-ended schemes, rather than FMPs that are closed-end. And stick to schemes that invest in higher rated instruments.

(The author is a freelancer writer)