FMPs: Thin margins, high volumes

Despite thin margins, FMPs have ruled the roost in 2011 with the top 10 AMCs managing around Rs. 90,000 crore.

Mumbai: Fixed Maturity Plans have been the talk of the town in 2011. They are like a treadmill. AMCs have to keep launching them or hit a stop button. “FMPs are meant to keep sales guys busy,” says a CEO of a midsized fund house.

While some AMCs are ramping up the AUM through FMPs, others are not so excited due to the wafer thin margins in this product. It’s a volume game. Larger the assets gathered, higher the profits.

AMCs can charge 10 to 60 basis points as annual expense depending upon the whether the product is targeted at retail or institutional clients. Retail investors are charged more than institutional investors.

The expense ratio is low as FMPs are passive products which require fewer resources and less research, unlike an equity fund where stocks are bought and sold. However, raising bulk sums of money especially from retail investors is not a cakewalk. Distributors are offered a trail commission between 0.05% and 0.30% per annum, depending on the tenure of the product.

It is also a matter of business model for some fund houses to avoid FMPs. They prefer to deal in better margin products like equity funds which can charge above 2% as annual expense. Also, the money is short term in nature and the product is cyclical.

Franklin Templeton and Quantum do not launch any FMPs. Although Franklin Templeton used to come out with FMPs earlier, it has stopped now mainly to focus on building long term assets. Morgan Stanley, Sahara, Peerless, ING Vysya do not have a single FMP in their product basket. Fund houses like JM Financial, HSBC and Principal have not been so aggressive in launching FMPs. Other fund houses like Escorts and Edelweiss have a handful of FMPs.

“For investors to reap benefits from investment in a fixed income scheme, timing the exit is crucial. Also, returns are affected by the timing of the launch and the paper available for investing. In an FMP while one is locking in interest rates, the credit risk always remains. Besides, they (FMPs) are not very remunerative for AMCs,” says Jimmy Patel, CEO, Quantum Mutual Fund. “

One reason why AMCs frequently come up with FMPs is to ensure that assets are gathered in new FMPs to replace the assets going out through the maturing FMPs. If they don’t launch new FMPs, the assets under management dip. A majority of FMP subscribers tend to be HNIs and institutional investors.

Currently, there are 631 FMPs in the market (considering only growth option). AMCs typically file one offer document to launch a series of FMPs.

Despite the thin margins, top fund houses are aggressively launching FMPs. The top 10 fund houses are managing around Rs. 90,000 crore in FMPs.

“FMPs are launched constantly because they compete with bank deposits which are available perpetually. There’s a good arbitrage between bank deposit and FMP. The benefits of low cost are passed to investors,” says Sunil Subramaniam, Director - Sales and Marketing, Sundaram Mutual Fund.

FMPs posted an average of 9% annualized return in the last six months, making them one of the most preferred investment avenues, thanks to the rising interest rates and uncertainty surrounding the markets.

AMCs are now beginning to launch FMPs which offer double indexation benefits. While 2011 was the year of short term FMPs, now long tenured FMPs are being launched to lock in interest rates.

Betting big on FMPs

 Source: AMFI website