It's raining FMPs

The last two months have not been best of the times for fixed income investors but despite all this uncertainty, fixed maturity plans (FMPs) are shining through. Since July there has been a flood of FMPs in the market.

Fund houses have launched as many as 234 FMPs between July 1 and September 16, 2013, compared to just 74 in the entire first quarter of this financial year.

The genesis of the phenomenon lies in the ambiguity in the bond market. First the FIIs fled in June, and then in July, the RBI shocked the mutual fund industry by hiking the marginal standing facility rate (MSF) and putting a ceiling on total funds available under its repo window.

All this has led to liquidity crunch and that has shot up the short-term yields, throwing an opportunity for the debt investors to invest in short-term instruments which are giving higher yield with lower maturity. Since FMPs are closed-end funds and invest in debt papers with the intent of holding them to maturity, this does away with variations in interest rates and the resulting impact in the market value of the bonds. So, investors who are willing to compromise on liquidity for better post tax returns flock to these funds.