Fund houses are looking for cues from RBI on interest rate cuts
Mumbai: Mutual fund houses are likely to focus on longer tenure FMPs once RBI starts cutting rates to ease liquidity in the system.
RBI has raised interest rates 13 times since March 2010 but inflation has remained above 9%. FMPs offer higher post tax return in a rising interest rate scenario. Once interest rates fall, the returns of short term FMPs and liquid and liquid plus funds are likely to dip.
“The focus is now on 18 month FMPs wherein investors can get double indexation benefits. Once interest rates fall, investors will flock to short term income funds and medium term gilt funds,” says Mahendra Kumar Jajoo, Executive Director, CIO, Fixed Income, Pramerica AMC.
Double indexation benefit can be derived if investments are held for more than a year. Double indexation offers two years of benefits while calculating long term capital gains tax. However, if the proposed DTC rule is applied to FMPs, investors will only get the benefit of one year indexation compared to two year indexation which is currently available.
FMPs invest in certificate of deposits and commercial papers of companies which mature just on or before the term of the scheme ends.
Currently fund houses are launching FMPs having tenure of 90 days to 540 days. According to fund managers one year FMPs will start looking attractive once interest rates cool off.
“We will continue to launch FMPs in the next quarter as well. Once interest rates are cut we have to see if there is any appetite for FMPs. We will launch long term FMPs so that investors can take advantage of locking in rates for a longer time. We are closely watching any cues from RBI on interest rates cooling off,” says Ajit Menon, EVP & Head - Sales, DSP BlackRock AMC. DSP BlackRock manages Rs. 9,500 crore in its FMP book.
Killol Pandya, Head, Fixed Income, Daiwa AMC also echoes the same views “Once the interest rates soften people would like to invest longer. Six months to one year FMPs will become attractive as opposed to three month FMPs which is the flavor of the season now.”
Fund houses have raised a substantial chunk of money by launching more than 500 FMPs this year. Income funds under which FMPs are classified manage Rs. 3.14 lakh crore as on October 2011 which constitute 45% of industry AUM.
