Thread by @stepbystep888

Fixed Maturity Plans (FMPs)

Thread

FMP Vs. open-ended debt fund
life cycle of a FMP
no of FMPs Launched & AUM Mobilized
taxation & indexation
Once the darling of AMCs, Mutual Fund Distributors, Wealth Management firms, HNIs & Corporates, why it has lost its sheen.
#mutualfunds

Let’s start by looking at the difference between a fixed maturity plan and an open-ended debt fund.

life cycle of a Fixed Maturity Plan

lets discuss taxation & extra indexation. FMPs are a sub set of debt MF, taxation is same as debt MF i.e. if t<3yrs at marginal rate of unitholder & if t>3yrs, 20% post indexation

FMPs are mostly launched in Mar & mature after 3 yrs in Apr. investors can claim four CII

HNIs used to subscribe a lot in FMPs. MFDs & Wealth RMs (before the banning of upfront commission) used to take the upfronting of trail commission due to the close ended nature of the scheme. AMCs have the AUM guaranteed till maturity.

FMPs have a disadvantage, liquidity. Unitholders have to find a buyer offline and then execute on exchange, theoretically possible but practically very difficult & the prospective buyer will not give fair value and will only buy at discount (read: higher yield than market).

FMPs have 1 big advantage as well, once invested, there is no difference between smart and sleeping investor. As due to redemption (which is not allowed in FMPs), % of bad assets will not increase in FMPs

explained the same in an earlier tweet

https://twitter.com/stepbystep888/status/1229665446405652480

Now comes the most interesting part. Why have FMPs lost their sheen?
the no of schemes launched and AUM mobilized from Mar'19 to Mar'20
In Mar'19, AMCs launched 44 schemes and garnered AUM of 5727 cr vs in FY19-20 only 48 FMPs were launched & collectively ~ 4012 Cr got subscribed

It all started with the collapse of IL&FS, till then investors were sold FMPs as a replacement of FD to take advantage of tax arbitrage. It was after IL&FS investors realized the risk associate with debt mutual funds (including FMPs)
list of FMPs (Aug’18) having IL&FS exposure

The final nail in the coffin was standstill agreement between group of lenders (including AMCs representing unitholders of MF schemes including FMPs) & ESSEL Promoters. 44 lenders decided this on January 26th 2019 and Essel made it official on 3rd Feb.

below data as on 28 feb 19

One leading AMC tried to rollover the FMP, received notices from the regulator then took the exposure on their own book. Conflict of interest between AMC shareholders & FMP unitholders.

Sab chalta hai.

One AMC not giving full maturity value on maturity date and their MD & CIO Debt on different occasions giving excuses that we are returning more than the amount we have collected in most of the FMPs.

It all broke the trust of risk averse investors in the mis sold FD alternative (read FMP) and raised several questions:
1) AMCs have taken exposure as high as 20% in FMPs (the upper ceiling as per regulation).
2) LAS has risks of equity but returns of debt
3) standstill, really?

Mutual Funds are a pass-through vehicles and neither scheme information documents of fund houses nor SEBI’s mutual fund regulations have provisions allowing asset managers to restructure or enter into a restructuring agreement with the issuer of the debt.

*END*

Fixed Maturity Plans have the highest number of schemes in a category as on 31st March 2020 with 742 schemes out of a total of 1916 schemes.

Net Assets Under Management on 31st March 2020 for this category is ~140594 Crore only second to liquid funds with 334725.33

more info.