Understanding Mutual Fund : Fixed Maturity Plans - FMPs..!
By Mr. Meenakshi
sundaram Kannan
Noisy Share Market..!
Both the equity & the
debt markets have been in turmoil for the last two months.
Investors are
finding it difficult to invest. They are not sure where to hide or safeguard
themselves in this failing market. Is there any way out? Yes there is.
In
Mutual Funds, there is always one or couple of schemes that are available to
get decent returns without much volatility. This category of funds is suitable
for any type of situation and for any type of investor who wishes to reduce
volatility and get almost certain returns.
What we mean is, one close
ended plan that is usually called Fixed Maturity Plan (FMP).
Close Ended Mutual Funds..!
Most of the time,
investors frequently ask this question that in how many years we have to
invest and when will we get our money back?
Usually in Mutual Funds,
we can enter into funds at any time and get the money back on any working day
(or) as and when we need the money. This type of schemes are called Open Ended
Schemes. Most of the Mutual Funds come under this Open Ended category. The
opposite of this category of schemes are also available in Mutual Funds and
they are called Close Ended Mutual Funds.
Equity based as well as Debt based
Close Ended funds are available in Mutual Funds. In order to have reduced
volatility and to get slightly better returns, we recommend Fixed Maturity
Plan, which comes under Close Ended Debt fund category. FMP is also known as
Fixed Tenure Funds /Plans (FTF/FTP).
Fixed Maturity Plans - FMPs ..!
As we know, Debt Funds
are impacted by three types of risk. First one is interest rate risk, second
one is credit risk and the third one is liquidity risk. Out of these three
risks, FMP’s are mostly not affected by interest rate risk and liquidity risk.
The reason being, it is a fixed tenure mutual fund.
Here the fund manager
invests in the debt bonds, where scheme maturity and bond maturity are more or
less similar, so on maturity, he will get returns as per the agreed terms.
In
this way interest risk rate is averted, but at the same time, as any other debt
funds, these funds are also subject to credit risk. This has to be kept in mind
always. In order to reduce the risk of the investments, the risk averse
investors can choose FMP investing in AAA bonds, and those who wants to get
slightly higher returns and stomach the risk can go in for FMP investing in AA
bonds. (The fact of life is, in the recent past like ILFS, AAA bonds have also
come under the defaulting category.
We can keep this in mind, but should not
worry too much. It is one off case and all AAA rated bonds will not default at
the same time. We at least hope so)
How to Calculating Indicative Yields...!
In Fixed Maturity Plans,
we can calculate likely returns at the end of the maturity period.
Most of the
schemes will mature only after 3 years. This is because in the recent past, the
long term capital gain is applicable to debt funds only after 3 years. Returns
received before 3 years is short term.
For example, we can take 3 year FMP
which completely invest in AAA bond and get a yield of 9%. If the expense ratio
is 0.5%, then the likely yield from the schemes is 8.5% (9% - 0.5% = 8.5%).
Generally, FMP will invest in mixed assets - the table given below gives an
example of how to calculate yield in the case of schemes invested in more
papers with the different yields.
Example for calculating
indicative yield of FMP
|
|||
Instrument
|
Allocation
|
Expected yield
|
Weighted yield
|
AA Bond
|
75
|
9.25%
|
6.9375
|
AAA Bond
|
25
|
8.80%
|
2.20
|
Yield for the fund
|
9.1375
|
||
Expense ratio
|
0.50
|
||
Indicative final yield for
investor
|
8.6375
|
||
Current FMP open or in the pipeline for the month of November
List of open schemes and
the ones likely to open in the near future.
Fund name
|
Launch Date
|
Close Date
|
Tenure-Days
|
ICICI Prudential Fixed Maturity
Plan - Series 84 - 1247 Days Plan M
|
2-Nov-18
|
5-Nov-18
|
1247
|
Aditya Birla Sun Life Fixed Term
Plan - Series RN (1240 Days)
|
5-Nov-18
|
13-Nov-18
|
1240
|
Reliance Fixed Horizon Fund XXXIX
- Series 15
|
13-Nov-18
|
14-Nov-18
|
1259
|
Tata Fixed Maturity Plan Series 56
Scheme E
|
19-Oct-18
|
2-Nov-18
|
1099
|
UTI FTIF Series XXX - XI
|
12-Nov-18
|
26-Nov-18
|
1246
|
Closing
·
At the end of the day,
the debt funds are tax efficient than bank deposits and in FMP, tax on returns
are paid after indexation.
·
Take Home Money is
usually high in FMP after tax.
·
These are good option
for conservative investor to get more or less fixed return / expected return in
fixed period generally volatility is very low in this funds.
·
This is popular among
knowledgeable investors.
·
This will be good
option for current market, for risk averse investor.
·
This is the only fund
in mutual funds, where we can arrive expected returns more or less close to
reality
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