FMPs lose favour over a year

Last year's change in tax norms has resulted in their assets declining 30%, with a fall in each quarter; shift to long-duration income funds

Fixed Maturity Plans (FMPs), a popular debt mutual fund (MF) product, have seen erosion in investor interest following changes to the tax structure by the government in July last year.

At a time when inflows and assets under management (AUM) of other categories make new records, FMP as an asset class has seen assets size decline by nearly ~50,000 crore or 30 per cent to ~1.16 lakh crore in the past year.

The Union government's interim Budget in 2014 had raised the long-term capital gains tax on debt-oriented MFs to 30 per cent from the earlier 10 per cent. And, changed the definition of long term for debt funds to 36 months against the previous 12 months, effective from July 10, 2014.

FMPs were hit the most. Their maturity was 12-15 months, so that investors got the double indexation benefit. These are closed-end structured Quarter-wise average AUM in ~crore debt schemes, so designed that duration of the debt papers that form part of the portfolio are aligned with the tenure of the overall scheme. It is very much like banks' fixed deposits, as they offer a fixed return for a specific tenure.

Fund houses and corporate investors typically do not want to lock their investments for three years. Sector executives felt the changes would lead to redemptions and so, a rollingover feature was devised for existing FMP schemes, from a year to three years. However, this could not fetch the desired results and FMP assets kept declining.

Jimmy Patel, chief executive officer of Quantum MF, said: “Whatever could have been rolled over was done. However, the majority of big investors (largely companies) preferred not to roll over. During the March to June period, investors whose investments in FMPs matured have moved out.” The exit is visible in the sharp fall of 22 per cent in FMP assets in the quarter ended June.

Rating agency CRISIL said in its recent monthly report: “FMPs continued to bore the brunt of a change in the tax structure on debt MFs. Changing the definition of ‘long term’ to 36 months turned out to be unfavourable for FMPs. The category’s AUM fell for a fourth consecutive quarter and posted the worstever absolute fall of ~33,966 crore.”

According to a chief marketing officer of one of the largest fund houses: “On an industry level, we had estimated an outflow of nearly ~60,000 crore from FMPs after last year’s interim Budget. The decline is in line with our calculations. FMPs are not doing good and the sector is witnessing far less numbers of new launches. The majority of the money shifted to arbitrage funds and duration income funds.”

Currently, annual returns from duration income funds are about nine per cent. In arbitrage schemes, these were between seven and nine per cent. FMPs are currently offering around eight per cent return.

With strict norms from the Association of Mutual Funds in India on bonus stripping (typically found in arbitrage schemes), arbitrage funds are also losing favour. Investors in debt schemes are increasingly shifting to long-duration income funds (mainly gilt funds). Amid strong inflows, fund managers have allocated a little over 13 per cent of their total debt AUM to gilt funds.