From January till August, the industry has launched 400 FMPs which collected Rs 24,646 crore.
Fund houses are on a spree of FMP launches due to the high yields on short term rates. According to AMFI data, the industry has launched as many as 400 FMPs from January till August, mopping up Rs 24646 crore.
The maximum number of FMPs were launched in March (119) and in August (122). A lot of investors invest in FMPs during March to get double indexation benefits. Moreover, new FMPs are launched just during the time when the existing ones are about to mature so that money is rolled over in new FMPs.
For instance, in August, the industry launched 122 FMPs which collected Rs 18,861 crore and gross redemptions stood at Rs 51,631 crore, which suggests that lot of FMPs had matured in August. Also, the volatility seen in bond markets in July this year has seen a flight to safety by investors; this is a major reason for resurgence of FMPs as there is virtually no mark-to-market risk.
One year FMPs have been particularly popular among investors. “Bulk of the investor interest is around one year FMPs as that is typically the investment horizon recommended for fixed income investments. However there is selective interest in three year FMPs also. Three month FMPs are finding favour with ultra-short term category type of investors also,” said Lakshmi Iyer, Head, Fixed Income and Products, Kotak Mutual Fund.
A major chunk of the money in FMPs is collected by the top fund houses. The country’s largest fund house by assets, HDFC Mutual Fund raised Rs 6500 crore in FMPs YTD. Reliance Mutual Fund’s FMP book has increased by Rs 2227 crore from Rs 13,887 crore in March 2013 to Rs 16114 crore as on August 2013. UTI Mutual Fund, which has a FMP book of Rs 8500 crore, has mopped up Rs 3,000 crore in the last six months. Kotak Mutual Fund collected Rs 2,380 crore in the last six months. DSP BlackRock which has a FMP book of Rs 10,000 crore has mopped up close to Rs 3000 crore in the last six months from FMPs.
“There is a lot of interest in one year FMPs. Short term money is being parked in three month FMPs. Usually HNIs and corporates invest in FMPs,” said Shirish Patel, CEO, Prudent Corporate Advisory. Prudent has collected close to Rs 400 crore in FMPs in the recent past.
Vishal Dhawan of Plan Ahead Wealth Advisors said that FMPs have become popular as the interest rates are high. “Investors want safety in the fixed income portfolios. The yields have gone up after the RBI measures and the rupee gaining strength. We are recommending our investors to build a mixed portfolio of one to three year tenor FMPs. We are comfortable with FMPs which invest in Bank CDs since they are safer than CPs,” said Vishal.
However, it is not easy for smaller fund houses to garner assets in FMPs. According to some fund officials, it is a tough task for smaller players to collect even the SEBI mandated Rs 20 crore in debt funds. An AMC’s pedigree, fund management capability and portfolio of FMP are the key drivers for investors to choose park their money. “Distributors don’t want to work with all AMCs. It is usually the larger players who are able to garner big sums,” said the sales head of private sector fund house.
Profitability and commissions
AMCs earn an average of five basis points on one year FMP and slightly more on higher tenors.
According to industry officials the margins (on the fixed income business) of the industry are likely to be under pressure this year as FMPs are low margin products. Last year, the industry saw good traction in bond funds which offered high margins – both for advisors and AMCs. The commissions doled out on bond funds were also attractive.
On the other hand, advisors don’t earn such attractive commissions on FMPs. AMCs typically pay five basis points trail on one year FMP and up to 30 basis points in FMPs having a tenor of more than one year. AMCs have to keep their expense ratios low in order to offer superior yields to investors.
Some advisors are not recommending FMPs to their clients as they believe that there could be reinvestment risk going forward. “In August FMPs were yielding anywhere 9.5 % to 10.5%. A lot of FMPs are getting launched in September also. The interest will wane from FMPs because the liquidity situation is getting tighter. We are not recommending FMPs because if the yields fall we can suffer a reinvestment risk. We are instead recommending long term gilt funds which are offering 8% yield,” said Vinod Jain, a Mumbai based financial planner.
