The Reserve Bank of India's financial stability report (FSR) has pointed at the risk of concentrated exposures in fixed maturity plans (FMPs) of mutual funds (MFs) in light of certain FMPs 'defaulting' on the date of their maturity.
As part of its analysis of 'risky' investment profiles of FMPs and open-ended debt schemes, the FSR said, "For FMPs, top-five holdings across schemes formed at least 40 per cent of the aggregate corporate debt portfolio, whereas the concentration of both top-five and top-three investments with respect to open-ended debt schemes were lower."
The report also pointed out that the nature of recent FMP defaults had primarily involved debt obligations backed by pledging of shares of group companies.
According to the report, the reason for limited diversification in FMPs could be due to its smaller corpus. "Given that the corpus of FMPs is smaller, diversifying investments into smaller parcels may not be remunerative and hence... risk management is largely done through credit ratings. While such policies are sensible, as recent events demonstrated, idiosyncratic risks remain."
The analysis was conducted over 44 open-ended debt schemes belonging to top fund houses (accounting for 90 per cent of total assets) and 623 FMPs that were active as of December 31, 2018.
On the rating front, the study found that the rating profile of FMPs was better than open-ended debt schemes in terms of AAA-rated exposure. The central bank re-iterated the contagion risks that can arise from the disruption in MF funding. "MFs are the largest net provider of funds to the financial system. Hence, from a market interconnectivity perspective, MFs are intertwined intimately with the rest of the financial system. Consequently, any disruption in the MF market has immediate and significant spillovers in the asset markets," it said.