The Hindu Business Line : Funds hardsell fixed maturity plans ahead of credit policy

Kolkata, July 27 Far away from the rough-and-tumble world of equities, an interesting story of interest rates and yields of debt instruments, is unfolding days before the Credit Policy. At the centre of it is the argument that yields have dropped by 300 basis points or so in the last few months.

Propping itself up on this trend is the asset management industry, which is selling various fixed maturity plans (FMPs), aimed at investors who are looking for tax-efficient options, ones they think should allow them to generate real, post-inflation returns.

A number of fund houses have lately worked out products to suit the market’s latest requirements. For instance, these include ING MF’s FMP Series XXVIII, which has set July 30 as its allotment date. Its indicative portfolio yield is 8.8-8.96 per cent, which implies that an investor may hedge his yield even if the Reserve Bank of India tightens liquidity. This is assuming that 1-year CP/CD yields (now at 7.5-7.75 per cent) may go up by 100 basis points to 8.5-8.75 per cent.

In case the central bank does not work on tightening liquidity, the 1-year CP/CD yield may dip by 100 basis points to 6.5-6.75 per cent. In such a scenario, the investor may gain 200 basis points by investing before the Credit Policy.

Hard or soft, any possible RBI stance, it is felt, will not take the market’s focus off FMPs altogether. Rates, according to Prudential ICICI MF, have already moved considerably higher in recent times, a situation that has made housing and consumer loans a costlier proposition. For purveyors of debt instruments, the interest yield scenario has changed enormously.

The fund house has indicated that a typical one-year paper, commanding good credit rating, will provide an indicative yield of up to 9 per cent, a marked variation from the 7 per cent or so that was prevalent a year ago.

FMPs, which attempt to engender higher yields often take greater exposure to corporate bonds that carry higher credit risk. Besides, FMPs remain 1-36 months debt funds, each with a pre-set maturity date. What goes in their favour is tax efficiency (in the shape of post-tax returns) which may well be greater than certain other alternatives, including deposits with commercial banks.

Experts, however, say bank deposits and FMPs are incomparable. Their compositions are different. Nevertheless, income from deposits is taxable fully, attracting marginal rate in tune with a tax-payer’s tax bracket. On the other hand, an FMP that is held for a year or more results in long-term gains – 10 per cent tax without indexation and 20 per cent with indexation.

More Stories on : Mutual Funds | New Fund Offer

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page