Last week PersonalFN wrote to you about Fixed Maturity Plans (FMPs) losing their flavour and some mutual fund houses either withdrawing their New Fund Offers (NFOs) or extending the last date of their NFOs. But here's a new twist.

Four mutual fund houses viz. DWS, DSP BlackRock and Reliance have launched FMPs (which are close-ended) investing in a combination of debt and equity; having a maturity period of three years. The launch of these FMPs come at a time when there are downbeat economic sentiments prevail in the domestic economy, which in turn have made Indian equities look relatively attractive and yields in longer maturity debt papers have risen.

You see, most FMPs which are mandated to be hybrid in nature, usually allocate their assets between debt and equity in the ratio of 80:20, thereby being categorised as debt oriented mutual fund schemes. While the debt component of the portfolio intends to preserve capital, it is noteworthy that interest rate cycle, liquidity conditions, and other macroeconomic factors are risk thereto and determine the course of yields for FMPs. The equity component of the portfolio for such hybrid FMPs act to be catalyst for accelerating the process of wealth creation over the maturity period.

So should you invest in such hybrid FMPs?

Hybrid FMPs are suitable for risk-averse investors. But should you really invest in those which have a three year maturity period? Well, to answer that let us look at the macroeconomic backdrop, which paves the path for interest rates.

Macroeconomic backdrop and path for interest rates...

Thus far since April 2012, the Reserve Bank of India (RBI) has reduced policy rates by 125 basis points (bps) (in order to address to growth risk) and the bond markets have rallied - sometimes ahead - on expectation of a rate cut from the RBI. In order to manage the liquidity situation, apart from a reduction in Cash Reserve Ratio (CRR) of 75 bps the central bank has also actively managed liquidity situation in the system vide Open Market Operations (OMOs). But now the alarming trade deficit of $20.14 billion for the month of May 2013 and weakening Indian rupee (against the U. S. $)seems to put a restrain on the central bank to take accommodative stance, although inflationary pressures have reduced. The RBI has clearly enunciated in its guidance from monetary policy that, the monetary policy stance will be determined by how growth and inflation trajectories and the balance of payments situation evolve in the months ahead.

Hence in the backdrop of the above, PersonalFN is of the view that if one is looking at investing in hybrid debt oriented funds, Monthly Income Plans (MIPs) can be considered as an option to hybrid FMPs. Aided by their investment mandate they can invest in debt securities across maturities depending upon their interest rate scenario; and you have the option to exit the schemes in case if it doesn't perform well, as most of them are open-ended in nature. Nonetheless, those investors who may still prefer FMPs should consider those with a lower maturity profile. Those who are further risk-averse can also invest in 1 year Fixed Deposits (FDs), as banks are offering interest on 1 year FDs in the range of 7.50% - 8.75% p.a.

PersonalFN is of the view that, investors should not try to time the market and should avoid speculating on interest rate movement.

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bbhanot@gmail.com Jul 08, 2013 FMP offers indexation benefit where as in FD one has to pay 30% tax. What is net benefit taking taxation into account. Can you throw light on the subject ?
bbhanot@gmail.com Jul 08, 2013 FMP offers indexation benefit where as in FD one has to pay 30% tax. What is net benefit taking taxation into account. Can you throw light on the subject ?

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