FMPs are back: Should you invest?

Fixed maturity plans are back. In the last few weeks, quite a few fund houses have applied to the Securities and Exchange Board of India for launching these products.

For instance, new fund offers of ICICI Prudential, Tata Mutual Fund and Fortis are on, while Religare, HDFC and Principal PNB have applied for launching NFOs.

And there is some enthusiasm among investors as well. "There have been some enquiries about FMPs. Investors want to know if it is a good time to enter these schemes," said a leading distributor.

Investors should remember that the rules of the game have changed significantly. In the past, they could enter and exit a scheme at will. There was a lock-in period but exit was allowed after payment of a load of 2-6 per cent.

But after the industry saw massive outflows last October, Sebi said FMPs would have to be listed on stock exchanges. Now, this meant that while investors could exit anytime, they would have to do so at a discount higher than the exit load. This is because of lack of a robust secondary market.

In other words, the liquidity of FMPs has come down substantially because investors cannot exit in case of an emergency. Market experts said this was good in a way because unit holders of the scheme have to stay invested for the entire period to reap the benefits.

Further, fund houses used to attract money by giving indicative portfolios and yields. However, after concerns were raised about the quality of portfolios in some cases because of high exposure to real estate and financial firms, Sebi in January banned declaration of indicative yields and portfolios. Sebi had said, "There is a general consensus that this practice should be prohibited as indicative portfolio and indicative yield may be misleading."

Fund distributors said unofficially, the annual returns of existing schemes based on a model portfolio were 7.25-7.5 per cent. In the next three months, many believe the returns will rise further.

Mukesh Dedhia, director, Ghalla and Bhashali, said, "Returns from these schemes are expected to improve. Investors can put in some money now and some later, thereby averaging out (the returns)."

Investment experts said some points should be remembered. Do not put short-term funds in these schemes and opt for the ones with tenures of one year to 15 months. And, stay invested for the entire period.

The returns will be higher than the bank fixed deposits because of double indexation benefits. That is, if you have invested in an FMP for just over a year, you will get the inflation indexation benefit of two years. This increases returns.

"For ones in the highest income bracket, the returns from fixed deposits will get taxed. FMPs are a good alternative," said a financial planner.