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FMP season is here again

india Updated: Aug 11, 2013 23:43 IST
Dhirendra Kumar

Unlike equity investors, for fixed-income investors stability and predictability is at least as important as returns if not more. The recent turmoil in the bond markets — and the resultant shockwaves in fixed-income mutual funds has made investors think twice about such funds.

Going forward, no one foresees any kind of smoothness in these types of investment returns. India is in for a period of macroeconomic instability and there's no telling when and what kind of shocks may run through the bond markets again.

Traditionally, in this kind of a situation, bank fixed deposits are the obvious choice.

However, for investors who like stability and high post-tax returns, the best choice is actually a type of fund called the fixed maturity plan (FMP). Fixed-term funds make excellent (and far more tax efficient) substitutes for bank deposits.

They are closed-end funds, limiting liquidity. Investors can invest only during the new fund offer and can redeem only when the fixed-term is over.

The return on them is also predictable. Before the crisis, fund companies used to offer an 'indicative' return. This has now been banned by Sebi, but investors get enough clues about exactly what to expect (9.75% to 10% currently).

Unlike many other funds, FMPs' return expectations have a basis in reality. FMPs invest in debt paper with the intent of holding them to maturity. This means that regardless of any variations in interest rates and the resulting impact on the market value of the bonds, the actual realised returns are known.

Of course, since you can invest in FMPs only when they are launched, wouldn't availability timed to your needs be a problem? Not quite. As a fund analyst recently pointed out to me, as soon as the circumstances turned conducive a flood of FMPs have been launched!