MF houses launch new FMPs, offer high interest rate than bank FD

With rising bank deposit rates, mutual fund houses are also making a beeline to attract investors by offering new fixed maturity plan (FMP). In the past 15 days, companies such as Tata Mutual Fund, Birla Sun Life Mutual Fund, Taurus Mutual Fund and IDFC Mutual Fund have been opened for subscription of eight new FMPs.

Almost all mutual fund companies have launched fixed-term plans of varying maturities ranging between 91 days to 1-year tenure.

Fund houses provide options of different maturity periods to the investors so that they can park their money depending on their requirement for capital.

Fixed term plans invest in debt securities in which the returns are locked in the beginning of the plan so the interest rate risk is reduced by a good measure.

According to fund managers present levels are good for investment in fixed-term funds.

FMPs have two features one is FMPs offer slightly higher returns than bank fixed deposits (FDs) and are not unstable as equities.

Naval Bir Kumar, managing director of IDFC Asset Management Company said, “This is a good time to invest in fixed maturity plans as the interest rates are high. If rates keep moving up, we will launch new plans.”

Short-term yield on debt instruments such as commercial paper is between 7 and 8 per cent.

If we calculate the gross yield, after deducting asset management expenses, the gross yield can be anywhere between 6.5 and 7.25%. Fund managers cannot give indicative returns on fixed-term portfolios.

As per latest hike fixed maturity plans for 90 days can offer returns upwards of 6 per cent, while fixed deposit for 90 days tenure are offering 4 per cent interest.

Returns gained in FMPs depend on portfolio construction and in which instrument(s) money has been invested.

Alok Singh, head (fixed income) of Fortis Mutual Fund said, “Fixed-term plans become attractive when short-term rates move up. FMPs though come with a rider of no liquidation. Unlike open-ended funds where investors can go for redemption, money in FMPs is locked up for the tenure of fund. Investors who have three months to one-year investment horizon can earn high yields at maturity in a FMP.”