IS IT TIME TO SAY GOODBYE TO FMPS ?

Can you suggest some good fixed maturity plans that are available now, where I can park my funds for three to five years?

S. N. Chatterjee

You do not have too many options to choose from, as most Fixed Maturity Plans (FMPs) available today are for terms of one year to 18 months. You may have a couple of options to choose from if you wait. However, even if such plans were available, we would not recommend that you lock into them at this juncture. Here’s why:

Don’t lock in


This is certainly not the best time to lock into a fixed income option for a 3-5 year term because the market interest rates, which the FMPs of today would reflect, appear to be close to the bottom of their cycle.

Market interest rates have been on a downtrend almost for a year now thanks to a series of cuts in policy rates by RBI, poor corporate credit offtake due to the economic slowdown and ample liquidity in the banking system.

Bank term deposit rates are in fact hovering close to a five-year low now. The rates offered for a one-year bank deposit have plunged by a full four percentage points from 10.25 per cent in December 2008 to about 6.25 per cent now.

You should note that, based on market trends, the 1-2 year FMPs that are being rolled out today may generate a yield of about 6-7 per cent annually if they assume reasonable risks, much lower than yields upwards of 10 per cent that were on offer a year ago. After SEBI’s redrafted regulations for FMPs came into effect, such funds are not allowed to offer any “indicative yields” to investors. Investors also not have any premature exit option from FMPs and have to hold on to the full term.

Rates to rise


In this context, there are now sufficient indications that interest rates will reverse direction and trend upwards over the next six months to a year. Signs of returning inflation and an improving appetite for corporate credit suggest that market interest rates may soon start trending upwards once again.

There is already evidence of corporate debt issues picking up with many companies also returning to the fixed deposit markets for funds. If this trend is sustained, investors can certainly hope to get better interest rates and a wider range of fixed income options, say three to six months down the line. That may be a better time to lock into longer term debt options. Investing in a FMP now would prevent you from taking advantage of more attractive rates or options, a few months down the line.

Having said this, we have two suggestions to offer now. One, you can park your money in short term debt options such as liquid funds or short term debt funds at yields of 5-6 per cent. The yields on these may be low, but these will allow you the flexibility to shift to FMPs a few months later once interest rates look up. Alternatively, you can deploy your money in the corporate fixed deposit options that do offer higher interest rates at this juncture.

Companies with a higher risk profile (JP Associates, Unitech for instance) today offer interest rates of about 11 per cent for one- to three-year terms.

Though these are not suitable for conservative investors, investors with some appetite for risk can certainly consider parking a portion of their debt funds in these options for a one-year term.

Conservative investors, however, should go in for the short term mutual fund options suggested above, as even debt options of good credit quality may offer better rates a few months down the line.