FMP'S IS THE WORST OVER

Several doubts have been raised in recent weeks about the portfolios and investment strategies of fixed maturity plans floated by mutual funds, until recently a popular substitute for fixed income options. How should investors assess FMPs and what caused the recent problems? An excerpt from an interview with Mr Amandeep Chopra, President and Head of Fixed Income at UTI Mutual Fund, to get a clear picture.

Recent months have seen a lot of reports about redemption pressures on fixed maturity plans (FMP). How significant is the problem? Has UTI Mutual Fund faced such redemptions?

It is true that there have been significant redemption pressures on FMPs. But this was concentrated only with a few fund houses. It is not a trend across the industry and it is not uniform. If you look at the September or October portfolios of UTI Mutual Fund, we have not faced any redemption pressures. We had a little, but this was mostly some of the smaller investors trying to exit FMPs.

FMPs hold illiquid assets and if we have to sell, assets may be sold at a discount. However, we have built in an exit load only to take care of this factor. We, for instance, have an exit load of 2-3 per cent on premature redemptions from FMPs, which is meant to offset the liquidity discount that such sales will involve. This is written back to the scheme.

What is the proportion of retail investors in FMP? Are the products dominated by institutional investors and HNIs?
The retail investment varies from product to product. In short-term products, say of three months or six months tenure, it is largely institutional investors who take exposure. For products up to one year, institutional investments will outweigh individuals. For UTI, I don’t have exact figures of the break-up. But my guess is that retail investors could be anywhere between 25-30 per cent of the (FMP) assets. This is largely due to our strong retail distribution network as well as our reaching out to traditional fixed deposit investors. Fund houses that are metro-focussed may have a more institutional investor-driven portfolio.

Concerns have been raised about the portfolio quality of FMPs and their exposure to NBFCs and realty paper. Are these, in your view, justified?

FMPs, being close-ended, essentially tend to invest in illiquid paper. Now, the benefit of that is a higher yield, due to an illiquidity premium. FMPs, at the time of launch, usually indicate a yield as well as portfolio based on recently traded securities at that time. Investors use these to take comfort on their exposures to FMPs.

What I understand is that some funds recently have not been true to their indicative portfolios. If I tell you I’m investing in triple-A rated securities and offer you an indicative yield of 10 per cent, you may take the call to invest, because the risk-reward ratio appears favourable. But if I then actually go ahead and invest in A-rated or unrated paper, that comfort is eroded and the investor may want to redeem his investment, because his objective is not met.

What I understand is that, in some cases, the portfolio did not reflect the initial credit quality indicated. Second, I think some portfolios did have real estate exposures about which concerns have been raised. I think the portfolio issue led to withdrawals by corporates and some retail investors too in Chennai. I think the high indicative yields on some of the FMPs tempted investors; but this actually involved taking on more risk.

Is it a problem of investors looking at FMPs as a substitute for fixed deposits and failing to perceive credit risk? I would think the other extreme is also a problem. If investors assume the entire portfolio will default, that too isn’t correct. Of a total portfolio of Rs 100, I may put, say, 5 per cent in lower rated paper to improve yields. Even if that entity defaults, the investor will still get his capital and a lower return, but there is no question of losing your capital.

Many FMP portfolios also own securitised assets. How can investors evaluate pass-through-certificates (PTCs) and securitised loans?
There are two types of securitised assets – one is CLO or corporate loan securitisation – in which a bank gives a loan to a corporate and this loan is securitised and further sold down. The mutual fund buys these securities and designates it as a securitised asset. The second one is that assets – which could be car loans, two- wheeler loans or commercial loans – are pooled together from various borrowers. A pool is created, with some ‘hair-cuts’ taken into account on valuation (a certain proportion of defaults are assumed by the rating agency). When these pools are created, we also look into credit quality.

You have funds investing in both types of securitised assets. However, the risk profiles of the two assets are very different. In my view, a pooled asset has less risk, whereas a single loan which is securitised carries almost the same risk as a bond or NCD issued by the underlying company. The risk on the latter can be securitised by collateral. What you need to see is if the corporate loan is backed by security or if it is unsecured.

To what extent does UTI MF deviate from its indicative portfolios for FMPs?

We have very strict norms that we don’t deviate from the indicative portfolio. If we have indicated that we will invest in triple-A paper or P1+ paper we never deviate from that. If we state we will not have NBFCs or realty, we stick to that too. We never invest in any unrated papers in our FMPs or liquid funds. However, we may substitute some names in our indicative portfolio, with similar rated paper in the same business, due to availability of paper in the market. But you will not find any change in the credit profile of our portfolio, relative to what we indicated.

What’s your advice to FMP investors?

My advice is that investors should hold on to their mutual fund investments. At the same time, they also need to evaluate the track record, portfolios and performance of the funds they have at least once a quarter. Rather than look at just the current portfolio, see whether the fund has delivered the indicative yields promised on previous products. If you see high indicative yields that are much higher than a safe bank deposit, I think you need to ask a few questions.

I think the bulk of pain for FMPs is over, with the money shifting from FMPs to liquid funds. With interest rates coming down, that’s really improved the prices of securities. The RBI taking steps to meet liquidity needs of the fund houses has also helped and the liquidity pressures have also eased considerably.