FIXED MATURITY PLAN (FMP) Invest ? LIMITATIONS !!


FIXED MATURITY PLAN (FMP)  Invest ? LIMITATIONS !!
FIXED MATURITY PLAN (FMP)  Invest ? LIMITATIONS !!


Table of Contents

* Where do Fixed Maturity plans invest ?
* Features of Fixed Maturity plans :
* Limitations of fixed Maturity plans :
* Recent crisis :                                                                                                                                                                                                                                                                                                        Fixed Maturity Plan (FMP) is a special class of close-ended debt mutual funds, which mature after the completion of a pre-defined time period. In this way you can invest in the FMP only during the period of new fund offer (NFO).

 After the completion of the NFO period, no new investment can be done in the FMP plan. Only after the maturity of this scheme, the fixed maturity plan investments can be redeemed, and during the interim, the time of redemption of units is not allowed.

WHERE DO FIXED MATURITY PLANS INVEST?

As a result of being classified as non-equity investment, the main investment of FMP is various debt and currency market instruments. Some of the more popular FMP investments are:
  • Government Securities (G-Sec)
  • CBLO (collateral lending and borrowing obligation)
  • CD (Certificate of Deposits)
  • CP (CP)
  • T-bill (Treasury bill)
  • Repo and reverse repo instruments
  • High rated NCD (non-convertible debenture)
  • Safe loan instrument

FEATURES OF FIXED MATURITY PLANS:

Fixed Duration : 

The maturity period of an FMP is fixed and once you invest through NFO, your investment is essentially lock-in till maturity. FMP's maturity period is usually more than 3 years from the date of allocation of the unit. This ensures that index profits can be obtained on FMP investments.

 Close-ended schemes :

It usually means that you can invest in this scheme only during the NFO period of the scheme. After the expiry of the NFO period, no additional investment can be made by the investors and maturity of scheme units can be done only after the maturity of the scheme units.

 Potentially low interest rate sensitivity :
Most investments made by these schemes are up to maturity, so FMPs have low level of interest rate (RBI) sensitivity. In fact, FMP investment allows you to lock interest rates for long periods, which can be beneficial during the falling interest rates.

Potentially less credit risk :
Most investments made by FMP are done in high quality loans and money market instruments that offer potentially low-level credit risk to investors.

Indexation Benefits on Returns :
Most new FMPs have a maturity period of 3 years or more. This ensures that long-term capital gains taxation rules apply to capital gains from these non-equity investments. Indexation provides the advantage of costly factoring in profits to investors, which reduces overall tax liability on profit.

LIMITATIONS OF FIXED MATURITY PLANS:

Low liquidity :
Since the scheme units can not be redeemed before the maturity of FMP schemes, the level of liquidity in these funds is low.

 If you want to redeem your FMP investment before maturity, then you can do so through the stock exchange where this plan is listed.

However, in case of redemption done through stock exchanges, a demat account is mandatory and trading volumes are often negligible.

 Lock-in rates :
While lock-in rates are an excellent choice during the falling interest rates, there can be a problem during the same period of increasing interest rates. When the market rates move upwards, the lock-in rates can reduce the returns with potentially lower risk levels.

No guarantee of return :
The less potential risk mentioned in the Fixed Maturity Plan means there is no zero risk for the investors and returns from the FMP are still linked to the market. Unlike other Fixed Return Instruments, such as Fixed Deposit, returns from FMP are not guaranteed.

RECENT CRISIS:

Some mutual fund companies, who lent to Zee (Essel Group), group units are stopping payments due to investors in their fixed maturity plans (FMP). Many FMPs, which are near maturity, are believed to be unable to repay the entire amount.

The reason for this is the delay in recovery from the Zee Group.

In six FMPs of Kotak Mutual Fund, investors will not be able to get the full maturity value. HDFC Mutual Fund has also informed the investors about plans to increase their tenure for an FMP.

 In the affected FMPs of Kotak Mutual Fund, investors will receive a partial payment of maturity proceeds for now.

They will get an amount equal to the value of the other holdings in the FMP: Net asset value is the loss due to My Sus Zee Group, which is about 20% of the total amount. The remaining amount can be paid when the fund house is able to recover the money from the companies.

In case of HDFC MF's FMP scheme matured on April 15, the investor may agree to either extend the maturity date or exit from the current maturity date. For exit investors, the units will be sold on the NAV applicable on the current maturity date.

 They will deduct the value of holding in Zee and get the remaining amount. Investors who agree to increase the maturity date can recover the entire amount, provided that Zee institutions can repay the loan.

Total investment of Rs 7,500 crore in Zee crisis-related institutions, out of which about Rs 1,400 crore has been organised by FMP. Most of the FMPs exposed to Zee Group are Kotak MF, HDFC MF, Aditya Birla Sun Life MF and Reliance MF.

There is a unveiling of Zee Group from 14% to 20% in different FMP funds and there is fear that there will be so much loss if it does not return the value.

 Essel Group is reportedly interacting with Sony Entertainment to sell its stake in Zee Entertainment. The sale is expected to be completed by September 30 and only after that the loss is likely to be offset.

For this reason, investors have learned a lesson about the risk associated with FMP investment, but this does not mean that investing in FMP should not only be kept in mind by the risks and invest in it accordingly.


thanks for the time .


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