Fixed maturity plans (FMPs) that controlled more than a fifth of the Indian mutual fund industry's assets in September are now losing out to a series of regulatory changes that make them a tough sell for fund houses.These close-end debt funds, which offer predictable returns and minimise interest rate risk by investing in papers with concurrent maturities, managed more than a trillion rupees at the height of their popularity in September 2008.
Their assets have halved since then and may drop further, following regulatory changes in December that banned pre-maturity withdrawals and forced their managers to list such funds, raising cost for the low margin FMPs and making them less liquid.
The regulator also instructed fund houses to stop declaring indicative yields on such funds, a key factor that lured large corporates to FMPs, removing the predictable nature of returns.
"Naturally, no investor would like to block his money," said R.K. Gupta, managing director of Taurus Asset Management.
Listing norm for FMPs was the main reason behind their rapidly falling popularity, he said.
The sweeping regulatory changes since December have come in wake of a liquidity crisis in September-October.
Large corporates had pulled out more than 900 billion rupees from fixed income funds, forcing the central bank to offer money through a special money market operation to ease liquidity woes.
Indian fund houses have launched about 30 FMPs this year, compared with nearly 100 in December quarter, data from fund tracker ICRA Online showed.
March, which typically sees a flurry of FMP launches as investors rush to invest into them to take advantage of favourable tax benefits, saw only 21 launches, compared with over 90 in the same period last year.
Interest into these funds will go down, analysts said, adding the assets managed by them will only drop as fund houses make their large clients shift money to better margin products such as money market and ultra short-term funds.
FMPs managed more than 500 billion rupees in April and ICRA Online estimates funds managing about 115 billion rupees are set to mature by August-end and about 245 billion rupees by the end of 2009.
"Ultra-short term and short-term bond funds would attract these inflows as these products have investment horizons between 3-months to 1-year and can offer higher returns," said Chintamani Dagade, a senior research analyst with Morningstar India.
Money market funds saw a record 518.52 billion rupees inflow in April, while income funds that include ultra short-term funds, attracted more than a trillion rupees as banks, flushed with liquidity, parked surplus cash in mutual funds.
Gupta of Taurus Asset Management said some money could also make way into equity funds as investors chase the Indian stock market that has surged more than three quarters from 2009 lows hit in early March.
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