Fixed Maturity Plans (FMPs) are debt mutual fund schemes, which had become extremely popular in the second half of year 2008 in India, and were being sold as a viable alternative to Fixed Deposit Schemes (FDs) of the banks. When equity markets were on the decline Mutual Funds kept their AUMs (Assets under management) intact by offering a slew of FMPs. Over Rs. 50000 crores was raised under various FMP schemes during 2008.
Why have FMPs become so unpopular in the recent past? Over the past two months there has not been any new scheme offering more than 3 months FMP. FMPs are no longer considered an attractive asset class by investors because of various reasons:
- Banks have been offering attractive returns on FDs
- Some good company deposit schemes are on offer (Tata Capital has launched its FCD issue offering upto 12% annualised return).
- SEBI has banned FMPs from being sold as Fixed income schemes. Recently fund houses have been banned from indicating the portfolio composition and returns from FMP.
- Pre mature withdrawal on FMPs is not allowed any more, and listing of FMPs on bourses has been made mandatory. Closed ended schemes normally trade at a discount to their NAV.
- Slowdown in the economy and the ensuing liquidity crunch reduced the creditworthiness of some companies whose debt instruments FMPs had invested, leading to erosion of investor sentiment.
It is the end of another financial product which has met with premature death because of 'mis-selling' by some Mutual funds/ Financial advisors. Investors should study the product thoroughly and take informed decisions. FMPs cannot replace Bank FDs as assured return instruments.
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