Changes in tax structure of debt funds and falling yields have taken the sheen off FMPs.
The number of FMP NFOs as well as the collections have dried up substantially. AMFI data shows that fund houses have launched 126 FMPs with maturity of 36 months or more in the last seven months. These FMPs have collectively mopped up Rs. 16,330 crore. In contrast, 106 FMPs were launched in the month of February 2014 alone, which collectively mopped up Rs. 21,307 crore.
Apart from the changes in tax structure, falling yields have made FMPs less attractive among investors. “FMPs were yielding 9-10% about 1.5 years back. Also, investors have benefitted by capital gains due to the rate cut. Now, the yields are around 8%. Many HNI and corporate clients are parking money in equity savings funds because of better tax efficiency offered by such funds,” says Pallav Agarwal, a Delhi based advisor.
“Investors are getting 7.50% post tax returns in arbitrage funds which is still better than 8% returns offered by FMPs. Also, FMPs are closed-end funds which creates liquidity problem,” says Nikhil Kothari of Etica Wealth Management.
With FMPs no longer an attractive bet, investors are moving to equity savings funds or arbitrage funds, which aim to offer safety coupled with stable returns. This is evident by the tepid demand for recently launched FMPs. The recently launched three year FMPs, on an average, have collected Rs. 130 crore in each NFO. In contrast, the recent equity savings fund NFOs have mopped up an average of Rs. 600 crore in each NFO. Apart from NFOs, existing arbitrage funds too have seen massive inflows.
Equity savings funds have been lapped up by investors due to tax efficiency, better returns and open end structure.
After the changes in debt funds, fund houses have virtually stopped launching one year FMPs as many of the investors who were investing in one year FMPs have now shifted to short term funds.
Also, advisors point out that the three year FMPs offer anywhere between 10-15 basis points upfront commission which makes it unviable for them to push FMPs. “If money has to be locked in for three years, investors might as well invest in equity funds. Low commission also deters IFAs from selling FMPs,” said a Mumbai based distributor.
