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FMPs & Short Term Funds Looking Attractive!
February 27, 2013

This is a brief note on the fixed income funds which investors can consider in the current market scenario.


Author : Dr. Renu Pothen



FMPs_article_Feb2013

In December last year, we came out with a note advising our investors to start taking an exposure into long term funds. In the current market scenario where fund houses are competing with each other to launch Fixed Maturity Plans (FMPs) while another set of them are coming out with open-ended funds which invests into banks Certificate of Deposits (CDs), investors are wondering if they should park their surplus money into any of these instruments or take exposure into actively managed short term funds. In 2010 and 2011, we were very bullish on FMPS and had aggressively advised our investors to take an exposure in the same. However, during most part of 2012, we recommended short term funds to our investors while during the end of the year, we recommended our investors having a time horizon of 1 to 1.5 years to take an exposure into long term funds. We are of the view that the central bank will go in for a softening monetary policy stance, but not as aggressively as they went on a rate hike spree. Although head line inflation has shown a tendency to move south, consumer inflation is still in double digits which should be a cause of concern to policy makers. In addition to this, there are threats to inflation both from domestic and global factors. Another worrisome factor is the growth momentum which is moving at snail’s pace. The quarterly GDP number which is to be released tomorrow is projected to be below 5% as per the Bloomberg consensus estimate. Hence RBI should adopt a policy which will be able to manage this inflation-growth dynamics effectively.

The last quarter of the financial year is the time when the liquidity situation in the economy remains tight. The reason could be attributed to the banks borrowing in a big way to meet their yearend targets which in turn leads to a spike in short term rates. Advance tax flows also add to this already tight situation. Hence, we advise investors to get into those funds whose strategy is fine tuned to take advantage of the prevailing market scenario.

CHART 1: YIELD OF VARIOUS DEBT SECURITIES

FMP_chart

Our Take:

Investors who want to lock in their money in an instrument with negligible interest rate risk can take an exposure into FMPs.This instrument can be used as an alternative to Fixed Deposits on account of the efficient tax advantage and better return prospects.

As for our other investors who do not want to lock in their surplus, they can consider our recommended short term fund i.e. PineBridge India Short Term Fund. This fund which has found a place in all our model portfolios continues to be our best bet for these investors in this current uncertain environment. The fund manager has been actively managing this fund as can be seen from the fact that the exposure of this fund into CDs has been drastically increased from a mere 24% in October 2012 to around 66% in January 2013 to take advantage of the short end of the curve which looks very attractive during the last quarter of a financial year. The fund manager has also been playing out the tactical allocation into G-Secs with an average exposure of 8% in the last 1 year. Hence, investors with a time horizon of 6 months to 1 year and who want to let the fund manager actively manage their surplus depending on his views on the fixed income market, can go in for this fund from the PineBridge stable.


iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.


 


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