April outflows underscore waning appetite for fixed-maturity plans

Turbulence in the debt market has been weighing on investors in fixed-maturity plans (FMPs), close-ended mutual fund (MF) schemes that invest largely in corporate papers. The sizeable net outflows witnessed in this segment has underscored the trend. Last month, FMPs garnered a paltry sum of Rs 384 crore, while redemptions came in at Rs 18,028 crore —translating into the net outflow of Rs 17,644 crore. This was the highest outflow among all debt categories in April.

“A lot of FMPs matured last month and investors have been deciding against re-investing," said a senior industry official. 

Experts say the liquidity crunch in the debt market is one of the reasons weighing on investor appetite. 

“Typically, a large portion of maturity amount gets re-ploughed. However, given the current liquidity challenges and expectations of rising interest rates, investors are increasingly adopting the wait-and-watch strategy,” said a debt fund manager.

Credit risks have also dampened investor sentiment on FMPs. Recently, Kotak MF and HDFC MF were unable to pay the expected amount to their FMP investors on maturity due to exposures to Essel Group.

MFs with debt exposures to Essel Group had entered into a 'standstill' agreement with the promoters, which effectively extended the maturity of these debt papers to September. Meanwhile, data from Value Research showed that 19 FMPs will be maturing before the extended timeline given to the promoters. 

Experts say FMPs investors are likely to avoid FMPs with riskier credit exposures after such episodes and would prefer FMPs which have exposures to higher-rated debt papers. 

Investors’ flight towards safety can be further gauged from outflows in credit risk funds. The segment saw a net outflow of Rs 1,253 crore in April. On the other hand, overnight funds, considered to be safe bets, saw renewed investor interest with the gross inflow of over Rs 30,000 crore.

Overnight schemes take exposures to collateralised borrowing and lending obligation instruments, which can even have a maturity of a day and are considered safe as borrowers are required to place liquid securities as collateral. 

Concerns over credit risks were triggered by the Infrastructure Leasing & Financial Services (IL&FS) crisis in September, which tightened liquidity for NBFCs that relied heavily on short-term funding. 

Also, events at Essel Group and Anil-Ambani-led Reliance group have put the spotlight on the loan-against-share model, where promoters have been borrowing from MFs by placing their company shares as collateral.