FMPs may see higher inflows as bond yields surge

Volatility in short-term rates of money market instrumentshas added to trend as investors seek higher return in FMP schemes

The mutual fund industry is likely to see more inflows into fixed maturity plans (FMPs) in the near-term on the back of higher yield in government securities, driven by the recent liquidity tightening.

Also, volatility in the short-term rates of money market instruments, which has prompted redemption pressures in liquid fund category, has added to the trend as investors seek higher return in FMP schemes, say industry players.

Since July 16, when RBI unveiled some drastic measures to stem the rupee slide, the bond yields have surged by around 70 bps to 8.12% on the benchmark 10-year paper last Thursday. The yields had touched a peak of 8.50% on July 24.

"Inflows have improved in FMPs because of the higher yields that are a result of the policy actions in the recent weeks. By locking at the currently attractive yields, investors can earn better risk-adjusted returns in otherwise volatile times.

Specifically, the yields are much better than in the under-three-year instruments," ICICI Prudential MF senior vice-president and head of products & communication Himanshu Pandya told PTI.

FMPs are close-ended schemes with maturity periods primarily ranging between 90 days and under three years.

Last month, the Reserve Bank had taken several liquidity tightening measures like capping of overnight borrowing limit for banks, additional sale of government securities, and tightening of hedging rules for FIIs among others to stem the rupee fall, which has been losing since May 22 on FII outflows.