The Hindu Business Line : De-rating cloud hangs over fixed maturity plans

Mumbai, Sept. 29 The hugely popular fixed maturity plans (FMPs) offered by mutual funds may now face pressures as the risk profile of this category of schemes has substantially changed over the last month.

Fund houses that have large exposures to corporate debt paper and unrated papers have reason to worry, as the worldwide financial crisis could lead to de-rating of domestic debt instruments too, said analysts.

There may be some default as portfolio managers were under pressure to give higher returns and some of the FMPs may have invested 10 to 15 per cent of their assets in such papers where returns could be doubtful, said the head of fixed income at a mutual fund house.

“Rather than looking at just the yields, investors are more importantly looking at the quality of the portfolio,” said Mr Parijat Agrawal, Head-Fixed Income, SBI Mutual Fund.

This stands to reason as there is little interest rate risk for FMPs. However, nobody can guarantee against a default risk, said another fund manager.

Fund spinner

“Usually FMPs are a good source for mobilising higher AUMs; and so many a times, fund houses use higher indicative yields as a marketing gimmick but they end up investing in low-grade paper,” Mr Krishnan Sitaram, Head of Crisil Fund Services, Crisil, said.

According to SEBI guidelines, mutual funds can invest no more than 25 per cent of their NAV in unrated papers.

“If FMPs bomb, they bomb. You cannot take legal action unless you prove that it happened because of mismanagement (of the fund). Mutual funds are banned from giving any guarantee of return, it forms part of standard risk disclosures,” explained a broker.

More schemes

Over the last four weeks, 42 of the 64 offer documents filed by mutual fund companies with SEBI were for FMPs.

Altogether, 648 FMP schemes have been launched since April, according to Value Research, a mutual fund tracking organisation

The rush for the FMPs started after the downturn in the equity market in January-February this year.

As equities declined and interest rates rose, returns from Government and corporate debt became attractive.

The AUM under FMPs at the end of August stood at Rs 88,691 crore, accounting for 16 per cent of the total AUM by mutual funds.

Until six months ago, FMP assets were almost unchanged: From August 2007 to January 2008, they rose from Rs 66,660 crore to only Rs 69,451 crore. However by August this year, the AUM was Rs 88,691 crore, showing a 28 per cent growth.

However, since many FMPs are of a very short tenure – of 30 days to one year – their AUMs cease to figure in the total assets after maturity.

The fund houses that have been most active with FMP schemes include HDFC Mutual Fund (72), ICICI Prudential Mutual Fund (56), UTI Mutual Fund (53), Reliance Mutual Fund (52), ING Mutual Fund (36), Birla Sun Life Mutual Fund (33).

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