Fund officials expect Rs. 15000 crore to flow in FMPs in March.
Fund houses are rushing to launch FMPs as investors are looking to take advantage of double indexation benefit from longer tenure FMPs. As many as 40 FMPs are currently open for subscription.
“Investors are looking for products which have less risk. FMPs score over bank fixed deposits because they are more tax efficient. There is decent appetite for FMPs but not all fund houses are able to get the same wallet share of investors,” said a senior official of a mid-sized fund house.
While large fund houses are easily able to raise money from investors, small fund houses are finding it a challenge to keep up with the competition.
High interest rates, excessive supply of FMPs and lack of liquidity are posing a challenge for some fund houses to raise money in FMPs. Recently some fund houses had to extend the NFO period as they could not raise the mandatory Rs. 20 crore in their FMPs.
“Almost all fund houses are launching FMPs. There is not enough liquidity in the market. The interest rates have been high from the last few months,” said Akshay Gupta, Managing Director & Chief Executive Officer, Peerless Mutual Fund.
According to rough industry estimates, Rs. 1 lakh crore has matured from FMPs in the last few months which is likely to flow back into the system. Fund officials say Rs. 10,000 crore to Rs. 15,000 crore crore is expected to flow in FMPs in March. The industry had collected Rs. 21,581 crore in March 2013. Typically a lot of high net worth investors invest in FMPs in March to take advantage of double indexation benefits.
"There is a good appetite for both short term and long term FMPs. Around 10-15 FMPs are maturing every day. Too many FMPs are launched because of which there is tough completion to raise money. The yields touched 10% yesterday which has come down to 9.75% now,” said Sarath Sarma, Executive Director & Sales Head, IDBI Mutual Fund.
Distributors say that smaller and mid-sized AMCs are the ones facing tough completion from larger peers.
“Fund houses have to commit to investors that around Rs. 200 to Rs. 400 crore will be collected through a FMP. If you are unable to build that size then it becomes a challenge. Every company has a criteria based on which on which they invest in FMPs,” said a sales head of a large fund house.
Some fund houses don’t launch FMPs as these are not very high margin products. Fund houses have to compete on wafer thin margins by keeping expense rations low in order to offer superior returns. Except Franklin Templeton, Quantum, PPFAS most fund houses launch FMPs.
Fund officials say that FMPs may lose their sheen if direct tax code (DTC) is implemented. The tax arbitrage between FMPs and fixed deposits will also diminish. If held for more than one year, income from FMPs is treated as long term capital gains which is taxed at 10% or 20% with indexation whereas the income from fixed deposits is taxed as per the nominal income tax rate. This is set to change under DTC as gains from FMPs will be added to the income and taxed at the nominal rate.
