Fixed maturity plans attract NRIs

Fixed maturity plans have been attracting a lot of inflows from non-resident Indians in the last couple of months and industry estimates that the inflows from this segment are up around 15 to 20 per cent.

This comes at a time when Securities and Exchange Board of India is planning to crack down on such schemes.

"FMPs are becoming popular among the NRI community and these last couple of months there have been significant inflows from this segment," said Raj Raman, senior vice-president, sales and marketing at Pru-ICICI Mutual Fund.

The reason for NRI inflows into these schemes are not far to seek - with investments into foreign currency non-resident accounts becoming unattractive due to low interest rates and no tax breaks, NRIs are looking at FMPs - which offer almost fixed returns along with easy liquidity.

The dividends, declared at the end of the scheme are tax-free. Raman said, "We are consciously working with the channels through whom the NRIs usually make their investments."

FMPs are now offering returns ranging between 5.5 to 5.7 per cent, while any investments in dollar denominated instruments would yield only around 2.5 per cent.

Further if they take advantage of the double-indexation benefit they will actually have a net loss, which can work to their benefit.

FMPs usually invest in instruments, which offer fixed returns and have a specified tenure, which coincides with the tenure of the instrument invested in. The tenure can range from 15 day FMPs to one year FMPs.

Most fund houses usually take the easy way out and invest in one year fixed deposits which are then rolled over between the various FMPs.

While it is difficult to estimate the actual assets under FMPs since most fund houses do not report them, the estimate is that at any point of time around Rs 6000 crore (Rs 60 billion) is invested in such schemes.

It is precisely this investment in FDs which the capital market regulator is frowning on and according to sources the axe might come down on such schemes much in the same way it happened with serial plans around four years back.

A few fund houses, in anticipation of this event, have already stopped launching FMPs. HDFC Mutual Fund is one of them. UTI Mutual Fund, does have FMPs, but the fund house is not really concentrating on these schemes.