Fixed Maturity Plans (FMP)

doesntMatter · Post by **doesntMatter** » Sun Apr 01, 2007 10:52 am

It appears as though none of these MF companies announce the Indicative yields in their offer documents for FMPs. I know for a fact PruIcici does not. Not sure of other MF cos. I guess they will have similar practices/policies.

If they cannot even commit to an indicative yield, then I wonder how come they are popular and how can we investors invest in them. In networking parlance it seems to be a "Best Effor" service with no sort of guarantees.

I guess the fact that these funds invest only in CDs, FDs, T-Bills and High Grade Corporate Bonds makes them low risk alternatives. But then my question is are these funds subjected to interest rate risk as Bond Funds are ? I understand that they are not, but how ?

This yield information is privy to selected few who have the knowledge where to tap for such information. This does not seem to be the way to increase awareness or mop up funds. Thanks to kdc_blue, we have a sample of how the yields look like:. Click on http://www.r2iclubforums.com/clubvb/showthread.php?t=178

Another tangential thought: Is there any chance that these MF cos are using FMPs to raise money to cover their cash reserves with RBI ? Is that possible ? The RBI seems to want to mop up money from the system and it is possible that MFs are playing to that requirement. Before someone attacks me, I am not accusing anyone but just speculating and looking for answers.

kdc_blue · Post by **kdc_blue** » Wed Apr 04, 2007 6:47 am

Good questions. I hope someone on this forum can answer them. If not I can ask my banker in India. Below are some more FMP's available for purchase along with their indicative yields as of today.

1 Lotus India FMP 13 Months - Series II 13 Months 10.75% (Inst) 10.50% (Retail)
2 Tata Fixed Horizon Fund Series 10 Scheme ? G 13 Months 10.70%
3 Reliance Monthly Interval Fund Series II Monthly 11.40%
4 RelianceFixed Horizon Fund - III - Annual Plan - Series IV 371 Days 11.05% (Inst) 10.80 (Retail)

RRK · Post by **RRK** » Wed Apr 04, 2007 3:07 pm

FMPs as the name indicate has to buy fixed maturity bonds. All the bonds will be of same maturity period to be in line with fund maturity target date.

During the holding period, if the interest rate goes up, your NAV should take a hit. ( same as other bonds); but since most of the investors who plan to hold the fund till the maturity period of 3 months or 6 months or whatever will not be impacted, because on maturity the bonds should pay the total maturity value, which is always higher than the principal amount.

This is exactly like the bond investors who hold the bonds to the maturity date and they don't lose the principal, due to interest rate increase.

Next CRR (Cash Reserve Ratio) is applicable for banks. There is no requirement for mutual funds to collect money to deposit with RBI. RBI may issue bonds that may be bought by the Mutual fund companies. But there is no gun on their head to do so.

FMP have very strict rules on exit. Most of them charge exit load; So go with FMP only if you are sure to hold it till last date. Also to avail the double indexation benefit, your holdings should overlap two financial years. Short redemptions will give you ST gains and taxed as such.

If you have missed FMPs, dont worry. The sky hasn't fallen. The liquid funds and floating rate funds should give almost same tax benefits and return in the time of raising interest rates. Because these funds will continue to buy new bonds that are yielding higher. Consider the flexibility to withdraw w/o a penalty is a trade off for slightly lower yields.

doesntMatter · Post by **doesntMatter** » Wed Apr 04, 2007 6:40 pm

RRK,
Thank you for your assuring response. It is good to know that we will not lose any money due to Interest rate hikes in FMPs.

Currently Liquid funds have a yield of about 8.5% pa but 1-month FMPs yield with Reliance Monthly Interval Fund Series II Monthly is 11.4% (before tax). I guess it will be arround 9.8%. So the cost of the flexibility is about 1.3%.

Reliance Monthly Interval Fund Series II Monthly is a fund that opens and closes every month on 15th and it has a fixed period of 1-month.

VRG · Post by **VRG** » Wed Apr 04, 2007 7:47 pm

Are FMPs subjected to PFIC?

R2I_member100 · Post by **R2I_member100** » Sat Apr 14, 2007 12:23 am

Will some one help me out with this.

I have some cash like Rs 50 lakh in India and wanted to be invested. I want to lock in the interest rate what is available now. Wanted to go with longest duration possible with this with say 9-10% interest rate locked in for that time period. Wanted to go with a bond fund than bank FD because of the advantage of taxation on bonds than FDs. How do I find good growth funds for long term?

If it is a closed end fund, where would one buy it from. Do we need a DMAT account for buying these.? What about open ended fund, where do i buy these from.? Same about FMPs.

Basic idea is to get the interest/dividend compounded at a fixed rate and locking it up now. Anyone have any idea about any funds like that.?

Thanks again for your time and appreciate all your help. Thanks

doesntMatter · Post by **doesntMatter** » Sat Apr 14, 2007 2:51 pm

R2I_member100;19561
Wanted to go with longest duration possible with this with say 9-10% interest rate locked in for that time period.

FMPs is one way to lock in a higher interest rate. I am aware of FMPs for 13 months. I do not know if they are available for longer than that.

R2I_member100;19561
If it is a closed end fund, where would one buy it from.

You cannot get into a closed-end FMP after it is closed. MF companies announce the openning and closing of an FMP and you will have to invest before the closing date. It is usually by 11:30 or 12:00 or some cutoff time by which you should apply. Then your money is locked in for the duration of the FMP. Again note that you will know the indicative yield only by talking to the sales agent of the MF house. It is not published anywhere.

R2I_member100;19561
Do we need a DMAT account for buying these.?

You do not need DMAT acct but would need your PAN card though.

R2I_member100;19561
What about open ended fund, where do i buy these from.?

For open ended funds you have a few options. You can buy from Online traders/brokers such as ICICI direct which would involve applying for DMAT (that is a 2 week process) or you can apply directly with the MF company of your choice.

Hope this helps. I am not very familiar with other low-risk fixed income options such as GILT funds etc that are available in India. Liquid funds is another option, you get a better rate than the Bank Savings Act and the flexibility to withdraw anytime (T+2 time for money to be deposited in your bank). I currently get abt 8% with PruIcici Sweepfund. The divident is payed daily and re-invested into the fund. So your units increase everday. If you want the kick of seeing your money grow, this is a good way :-)

VRG · Post by **VRG** » Sun Apr 15, 2007 6:44 pm

Thanks for sharing various options such as FMPs, GILT funds, Liquid funds etc. Are these subjected to PFIC?

Jaggudada · Post by **Jaggudada** » Sun Apr 15, 2007 9:40 pm

Can one invest in liquid funds, FMPs from US? How? Any website where they have information regarding all this non-CD/non-bank type of investments?

R2I_member100 · Post by **R2I_member100** » Tue Apr 17, 2007 3:57 am

#7
Thanks doesntMatter for the detailed reply. Really appreciate it.

[QUOTE]
You cannot get into a closed-end FMP after it is closed. MF companies announce the openning and closing of an FMP and you will have to invest before the closing date. It is usually by 11:30 or 12:00 or some cutoff time by which you should apply. Then your money is locked in for the duration of the FMP. Again note that you will know the indicative yield only by talking to the sales agent of the MF house. It is not published anywhere.

I was under the impression that Closed end FMPs can be bought just like Closed end funds in US, where you can buy them through secondary market. You might be paying more or less depending on whther they are trading above or below NAV.

[QUOTE]
FMPs is one way to lock in a higher interest rate. I am aware of FMPs for 13 months. I do not know if they are available for longer than that.

Can we buy long term bond funds for this purpose.? I think one problem with this approach will be the bond fund manager will try to do the trading to keep the duration constant, which will have more fees and might loose the value if interest rate goes high from here.

Does anyone know for the purpose of holding 5-10 years is there way to get the fixed interest rate locked with the current rate, just like FD plans from banks, but with better tax efficiency.?

Basically that is what I am looking to do. Lock the interest rate for a 5-10 years with the current rates, with a better tax efficient product.

Thanks again for your time.