Fixed Maturity Plans are back in fashion this summer

MUMBAI: For officials at fund houses, the April to June quarter is mostly about enjoying bonuses and mangoes. A temporary respite from pushing fixed maturity plans (FMPs) to treasury managers and wealthy individuals the whole year round. For, the abundant money in the system at the beginning of the new fiscal, have always made FMPs an unattractive option for investors, returns wise.
However, this time round fund managers may not be able to enjoy their ‘fruits of labour’ to the fullest. Thanks to the sudden hardening of the interest rate scenario and possibility of RBI going in for another rate hike in its upcoming policy review, FMPs are back in fashion in the summer of 2008.
More than a dozen FMPs of three-months, half-year and one-year durations are currently open. Fund officials said in case the RBI actually hikes rates at its April 29 meeting, investors can hope for some more offerings in the coming days.
“There is a lot of money to be made at the shorter end of the curve,” said ING Vysya Mutual Fund head-fixed income K Ramanathan, whose fund house has a 3-month FMP closing on Thursday. What he means is that funds that invest in bonds of the shorter duration, say of three months, can fetch good yields for investors, because of the central bank’s hawkish stance on interest rates
Investors usually bet on a stock or a bond much in advance to an expected event, which this time around is a likely rate hike by the central bank. FMPs are close-ended schemes that seek to generate regular returns by investing in debt, government and money market instruments. FMPs invest in instruments that generally mature in line with the duration of its scheme.
Though the returns offered by FMPs are not assured, investors can safely expect returns that are in tune with the prevailing interest rate scenario. In fact, fund houses give out indicative yields to prospective investors, in the hope of attracting them.
The summer of 2008 has seen yields going up very strongly and three-month paper is currently quoting at a rate between 8.9 to 9.2%. A few months ago, the yields on the same paper were in the range of 8.25% to 8.5%.
AIG Investments head-fixed income Sandeep Bagla points out that there were more FMPs hitting the market a month ago and expects things to pick up going further. “The trend may peak in case RBI actually hikes rates this month-end,” he predicts. “Yields on corporate bonds are yet to go up. This should happen soon (making FMPs still more attractive),” he says.
Most analysts are predicting that RBI will have to raise rates further to bring down the rising inflation, that is threatening to hit UPA regime’s record. “We think that the RBI will go for a 25 basis points increase in repo rate. The guiding principle would be to arrest inflationary expectations and further slow demand,” analysts at Goldman Sachs recently said in a note to their clients.