Mutual funds seem to be using fixed maturity plans as a weapon to combat loss of assets under management due to the tightness in the money markets.
According to industry sources, a plethora of FMPs launched in the past couple of months have raked in as much as Rs 5,500 crore (Rs 55 billion). FMPs, essentially targeted at corporate investors, combine the tax efficiency of mutual funds with the safety of a fixed deposit.
Last month, five mutual funds, Prudential ICICI, DSP Merrill Lynch, LIC Mutual, Deutsche and UTI, collected close to Rs 2,000 crore (Rs 20 billion) in their respective quarterly FMPs. In the month of November, LIC Mutual, ING Vysya, Kotak, Principal, DSP Merrill Lynch, HSBC Mutual, JM Mutual and Reliance Mutual collectively mobilised about Rs 3,500 crore (Rs 35 billion).
Another mutual fund company sponsored by one of the largest Indian business groups is understood to have launched an FMP only for its group companies.
Several mutual fund executives contacted by Business Standard did not wish to be quoted on the subject, though they explained this as an opportunity that suited both the buyer and the seller.
Since mutual fund dividends attract only a dividend distribution tax of 22 per cent as opposed to interest on deposits and corporate bonds, which are charged at the marginal income tax rate, mutual funds usually package fixed-term deposits and bonds as mutual fund schemes called FMPs.
These schemes usually come with a quarterly or annual term and are a huge hit with corporate investors who seek to lower the tax incidence.
Quarterly FMPs offer dividend plans to exploit the lower dividend distribution tax on funds. There are also annual FMPs which have a tenure of little over one year and offer growth plans where the gains are reflected in the net asset values instead of distributing gains through dividend pay-outs.
In these plans, investors can avail the benefits of indexation twice since the investment period involves two fiscal years and reduce the tax incidence to negligible amounts.
Since the maturity of the portfolio is matched with the tenure of fund schemes, FMPs produce predictable returns over the desired time period.
Unlike mutual funds schemes, which suffer from volatility, these products structured as closed-end funds, carry no interest rate risk. Their asset value is protected as deposits/bonds are held to maturity.
Industry sources said large corporate investors often negotiate deposit rates with financial institution or banks and then ask mutual funds to buy the same deposits and package them as mutual fund schemes to improve their tax efficiency. Mutual funds charge as low as 5 to 10 basis points as expenses, which is abysmally low.
Though funds have a wafer thin margin on these schemes, they can boast of stable asset sizes. In December, the total assets under management of funds was down only Rs 4,301 crore (Rs 43.01 billion) despite substantial redemption as collections in FMPs and surge in equity values made good part of the outflows.
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