Indicative yields of FMPs headed south

The first signs that the fairy tale for short-term fixed maturity plans (FMPs), in terms of returns, may be over are here. Mutual funds have begun to revise downward the indicative yields of FMPs after the Reserve Bank of India (RBI) announced a series of measures to ease liquidity in the system.

In September this year, returns were on the upswing, thanks to tighter liquidity conditions. FMPs launched in September were offering indicative returns (mutual funds can only indicate and not guarantee returns) of around 11 per cent for both short- and the long-term FMPs. This has now come down to the range of 9.95-11.10 per cent. However, this is still higher than the returns indicated by funds over a year ago.

In September 2007, three-month FMPs’ indicative rates were around 8-8.30 per cent, and for over 12 months, they were hovering around 9-9.50 per cent. While the longer duration FMPs are still indicating returns of around 10.5 per cent, the shorter duration ones have begun downward revisions in the indicative yields. FMPs, typically, park their money in securities that have matching tenure as the time period of the FMP.

For instance, HDFC Quarterly interval Plan C, which closed on November 10, has indicated a return of 10.6 per cent. HDFC's 90-day FMP that closed last month had indicated a return of 12 per cent. Similarly, Kotak's quarterly series 10 that closed in October had indicated returns of 12.25 per cent. The same fund house's quarterly interval series 6 has indicated returns of 10.5 per cent now. Quarterly interval plans are FMPs, but get rolled over every quarter.

"Yields are indicated according to the market yields. In the last 15 days or so, short-term yields have gone down by 50 to 75 basis points after the RBI measures. We expect that rates are headed lower from here on," said Parijat Agrawal, head-fixed income at SBI Mutual Fund. This means that indicative yields of FMPs are set to go down further.

Distributors say that a downward revision in the returns coupled with concerns over the quality of the paper held by FMPs has led to retail investors shying away from FMPs now. "Retail investors are not comfortable with FMPs since bank FDs are giving them good returns. This is especially with regard to investors who do not fall in the tax bracket," said V Krishnan, country head (mutual funds), Integrated Enterprises.

Short-term FDs are offering 7-8.50 per cent at present. Returns from FDs are clubbed with the investor’s income. So, if the investor falls in the highest tax bracket, s/he will be taxed at 33.99 per cent.