Fund houses are rushing to launch three year FMPs to lock in high rates.
Fund houses are rushing to launch FMPs on the expectations of a softening interest rate regime.With a drop in inflation, fund managers are expecting that the central bank may cut repo rate by 25 basis points in six months.
As many as eight FMPs are currently open for subscription.
“We have launched five FMPs and all of them have been successful. Investors want to lock in at the current rates as rates are expected to fall,” said the sales head of a public sector fund house. Fund houses like HDFC, UTI, Axis, Deutsche, Reliance, Kotak, ICICI Prudential have recently floated FMPs with maturity of 1200 days and more.
Fund officials say that though there is an appetite for FMPs among sophisticated investors, the collections from FMPs are not as high as earlier due to changes in tax structure of debt funds. They say that corporates are usually not willing to commit for longer tenure. “We collected close to Rs. 200 crore from the FMPs launched by us recently. The response is decent. However, the FMP market is not as big as it used to be earlier,” said Suresh Soni, Chief Executive Officer, Deutsche Mutual Fund.
Distributors say that most of these three year FMPs will mature in April 2018 which will help investors get four years indexation benefits. “Investors will get four years indexation benefit if they invest now. Another reason why there is a rush of FMPs is that rates usually go up during March due to liquidity crunch in the market which helps FMPs lock in high rates,” says Nikhil Kothari of Etica Wealth Management.
Another reason cited by distributors for the rush of FMPs is that commissions are expected to be capped from April. “AMCs pay upfront on FMPs and since upfront will be capped from next month they are rushing to launch now. AMCs generally pay 1%-1.25% upfront on FMPs,” says a Mumbai based distributor.
After the changes in tax structure of debt funds, long term capital gains from non-equity oriented funds are taxed at 20% tax after indexation now. If FMP investors redeem before 36 months, they are subject to tax at the marginal rate of tax. FMPs no longer offer the choice of paying taxes at 10% without indexation on long term capital gains. Long term capital gains in FMPs are taxed at 20% with indexation.
