The Mutual Fund Show: Are Fixed Maturity Plans Still An Attractive Investment Bet?

Amol Joshi: It depends on whether your FMP contains the papers which are currently facing liquidity issue or papers where the promoters are facing the paper repayment ability issue. If that is the case, then your options are very limited. Kotak has redeemed only a large part of it and the remaining payment will come to you subject to recovery by Sept.30. Or likes of HDFC who think that within a year or so you are likely to recover your principal as well as coupon. That is probably the only thing which you can do. What you can do if you are a prospective investor into FMPs is that there is something called as a high yield FMP wherein the debt fund manager would go down the credit curve, probably take the low-rated credit for a higher yield, and there are certain credits which are ‘AAA’ rated which have much greater liquidity and chances of repayment. You can always look at FMP for your future investments—the FMP which invests in higher credit or higher credit quality papers. That’s what you should do if you have existing investments or if you want to invest the fresh chunk of money in FMPs.

Tarun Birani: The serious thing which needs to be looked at is the concentration part. The concentration of single promoter holdings in these FMPs has been very high. This is a cause of concern. Due to lock-in kind of nature, the investor doesn’t have flexibility available. I would rather look at open-ended FMP structures which are currently available in banking and PSU funds which have a roll-down maturity kind of structures. I would rather be looking at something like that because one risk is the concentration risk, which for a normal investor it is difficult to understand. Second, a loan against security kind of structure. As a debt instrument, loan against security is something which is giving a quasi-equity kind of structure which, according to me, in a debt structure, an investor has not come to suffer in all these kinds of things. When I want to take a risk, I would rather take an equity kind of risk. For debt thing, I will try to keep it very safe and simple. For me, FMP is a no-no in the current scenario. From the last couple of years, we have started disliking FMP as a structure because illiquidity is not working for the client and the credit quality, papers are a concern. So, you would rather get into open-ended structures where you have flexibility of moving in and out. We don’t want to play credit.

Amol Joshi: FMP is certainly an option. For our clients and portfolio, we don’t have any FMP. I believe that you only have that much money to which you have access. If it is a locked-in fund and for whatever reason, if you need the money during the term of FMP, despite having money you will not have access to it. It is like not having money because FMPs are close ended structures. Despite my liking or not liking the close-ended FMP structures, I should take an impartial view. If somebody who does not want to take any interest rate risk, and wants to invest in debt paper which closely aligns with his/her maturity and his/her withdrawal profile. I want money 3.5 years later and here is a product which invests in debt securities that will pay back and mature 3.5 years later. To that person, FMP still works as a better option. FMP also has various other advantages. Those advantages are equally applicable in open-ended funds. If you invested during the last quarter, by investing in FMP for three-years one-month or three-years two-months, you will get four indexation benefit which will reduce your tax outgo. That is a wonderful advantage. But at the same time, this advantage is available for open ended schemes too. Except one-two categories of open-ended schemes which have a rolled-on maturity. Despite having an open-ended structure, the fund manager will invest into securities and all of them will mature at designated day or designated period, depending on the mandate of the scheme. Other than that one set of schemes, every other debt scheme will have some interest rate risk. If the interest rate goes up, it will make capital loss and it will reflect into your NAV. I would not paint FMP black as a product and I will not say that it is a strictly no-go area, if you do not want a interest rate risk and if you are happy taking a four indexation, please choose an FMP which invests in papers for which your risk appetite allows you to. Don’t go down the credit curve if 0.5 percent return currently excites you. There happens to be 10 percent downside at the end of three years. There are lot of innovative products. Currently, you have State Development Loans. They are quasi-government, quasi-sovereign sort of papers. If FMP like that comes into the market, I don’t see any reason why you will not invest into it.

Tarun Birani: It could again start with the suitability exercise for the client wherein what kind of time horizon and risk appetite client has needs to be understood in detail. Also, what kind of experience does a client have? I have a binary philosophy that if you look at equity, I look at risk. If you are looking at debt, I don’t want 13-14 percent exciting yield structures. Whenever investors invest in debt, the behavior is like risk of capital is completely zero. When you get a shock like this which you get from FMP recently, I think investor confidence can go for a toss. I would look at debt from a safety point of view. You have mentioned contra-oriented strategies. Investors who have invested in contra situations like this wherein the credit yields are upwards of 13-14 percent, couple of things investors should be careful about is what kind of concentration the portfolio has as a single promoter holding. If the fund scheme has not more than 2-3 percent in a single promoter, then it could be a great idea because risks are fairly divided, compared to those who are holding 10-15 percent in single promoter. So, those kinds of credit risk funds should be avoided and funds with 2-3 percent promoter holding could be looked at. For debt structures, safety is important. Rather, look at something which has a good credit quality.

Amol Joshi: Before the SEBI re-categorization exercise of June - July 2018, prior to that corporate debt funds were the funds which took credit exposure. After the scheme re-categorization nine-ten months ago, now the corporate debt funds invest in ‘AAA’ rated products. When someone says that corporate debt is an attractive opportunity, it is because it is ‘AAA’ rated and you have safety and are much less likely to face an FMP illiquidity scenario. Since it is corporate debt, it has no comfort of sovereign guarantee or of being a state issued paper. The coupon has gone up because the overall corporate sentiment has already deteriorated because of DHFL, IL&FS to Zee. Before these events played out, you were able to buy this ‘AAA’ or ‘AA’ rated security at Rs 850 apiece. Today, because the sentiment is bad, you are probably buying at a yield of 9 percent. So, at the same risk, no material changes have taken place in that company’s balance sheet because Zee promoters’ pledge issue has happened. So, you are able to get 0.5 percent additional yield for the same security which you were comfortable till yesterday. So, these may be two points which a fund manager had in mind before recommending these funds at this juncture. Corporate debt funds are 80 percent ‘AAA’ rated and does it in securities which they invest into, and you are getting more bang for the buck compared to few days or weeks ago.

Tarun Birani: We will avoid FMPs right now but for the debt funds, I will look at banking and PSUs category. The YTM looks attractive there. The big benefit there is locking at a higher rate. People like FMPs because like fixed deposits, they want to lock at the current rate. These open-ended FMPs, even if new money comes in, they will make sure the maturity of the portfolio maintained is similar. Let’s say, you are entering today, so your yield gets locked in. Due to that, it acts like an open-ended structure. In emergencies, you have a without-exit-load structure available. The banking PSUs, Axis and IDFC have both these structures available and it gives you indexation for four years. To me it looks the best bet right now. Apart from that, one can look at corporate bond funds. At this point of time, we would like to pay shorter end of maturity, which looks much more attractive. We would like to avoid longer maturity dated funds.

Amol Joshi: If the investor is not super conservative and is happy with a liquid kind of structure and a return of 7.5 percent, if there is an additional alpha which you are chasing without going into ‘A+’ or ’A A-‘ space, you can look at Franklin India Corporate Debt where you have a mix of all the things which you can look for. One is ‘AAA’ rated papers, which is 80 percent or so. The other is the higher YTM. Another is a superior credit assessment and superior credit team. Because of these, you can look at corporate debt funds like Franklin Templeton. Currently, you are better off investing into short-to-low maturity debt papers. Even a three-four-year modified duration is too much at this stage. The best space to be in is between a one-two years sort of a modified duration. Any low duration fund which has a decent diversification of not more than 2-3 percent average allocation to a particular security, then low duration or these funds which I have mentioned these are solid