Read on to find out what filters you should apply before recommending an FMP to a client.
With a flurry of FMPs hitting the market, it is quite a task to identify the right FMP for your clients. In December alone, 74 FMPs hit the market and collected Rs. 6776 crore.
So what factors one should consider before recommending a FMP to a client?
The first and the most basic parameter one needs to factor in is the time horizon of the investor. Based on the time horizon, FMPs maturing at the similar tenor can be shortlisted. The second important filter is the quality of the portfolio.
Vinod Jain of Jain Investments says that distributors should match the risk profile of an investor with that of the FMP. For instance, he suggests that risk averse investors can be recommend FMPs which exclusively invest in bank certificate of deposits (CD) which come with a high margin of safety.
For investors with slightly higher risk appetite, Vinod suggests that one can consider FMPs which invest in a mix of bank CDs and AAA rated paper.
“As the regulator has prohibited AMCs from publishing the indicative yields and portfolios, the only alternative is to check the portfolios of the FMPs previously launched by the fund houses. This will give an indication of the instruments that they have been investing in, along with the quality of these instruments,” says Dr. Renu Pothen, Head of Research, Fundsupermart.
There are 43 AMCs in India out of which the top 10 AMCs manage 78% of industry’s assets. Needless to say, a large portion of money is mobilized by big fund houses. So should advisors look at the size of the fund house while recommending a FMP? It’s not relevant, say experts.
It doesn’t matter if the fund house is big or small since the yields are generated by the paper a FMP invests in. However, it would still be a good idea to check the credibility and background of the fund house. “As far as FMPs are concerned, investors should look at the parentage of the fund house and their ability to manage short term funds,” adds Renu.
Advisors say that March is a peak season for FMPs since yields are usually high due to the squeezed liquidity in the market. That is the time when most people invest to avail double indexation tax benefit. In March 2012, the industry launched 122 FMPs which mopped up Rs. 23,332 crore. In March 2011, as many as 154 FMPs were launched which garnered Rs. 36,293 crore.
With the recent policy rate hike yields FMPs have turned more attractive for investors. “Investors can consider locking into these rates through one-year plus FMPs if they are conservative. Investing at this juncture would provide double indexation benefits as well,” says Vidya Bala, Head Mutual Funds, Research, FundsIndia.
