According to data available from Value Research, a mutual fund tracking agency, mutual fund houses have parked nearly half of the money collected through Fixed Maturity Plans (FMPs) in the last quarter (January to March period) in short-term bank deposits to benefit from the "assured" returns offered by the banks, instead of deploying these funds in the debt securities markets.
Several fund houses have been marketing FMPs as an alternative to bank deposits as debt schemes have been giving attractive returns up to 11-12 per cent for a period of more than one year.
Besides, FMPs also offer double indexation benefit to the investors, which is particularly helpful to investors belonging to the highest tax brackets as this reduces their tax exposure.
However, this 'precautionary' investing by the funds came under the Securities and Exchange Board of India's (Sebi) lens, which asked the fund houses not to park more than 15 per cent of the assets under management in any particular schemes.
Of the Rs 9,962.39 crore (Rs 99.62 billion) collected by MFs through FMPs during the last quarter of 2006-07, nearly Rs 4,698.50 crore (around 47 per cent) was parked with commercial banks as short-term deposits.
Some of the schemes have even invested up to 65 per cent of their corpus in the fixed deposits, as the fund managers found it safer to rely on "assured" returns given by the bank deposits than immediately investing in the debt market.
"As a safe-play strategy, some fund houses could have put excessive funds with the banks, which they need to bring down," Sandeep Bagla, head (fixed income), Principal PNB AMC, said.
The market regulator has now given the fund houses three months time to abide by the new guidelines. Industry sources said the new regulation did not mean that funds would be immediately withdrawing excess deposits as most of them would be maturing within the permitted three-month period.
Association of Mutual Funds of India is discussing the issue with the mutual fund houses. Some of the fund houses say that these rules should be made applicable to investments made on "prospective basis".
Another study by ICRA Online showed that fund houses such as ICICI-Prudential, UTI Mutual Fund, ABN-Amro were seen to be deploying a substantial portion of their FMP corpus in bank deposits.