At present, most fund houses in India are competing with each other to launch Fixed Maturity Plans (FMPs) with about 342 FMPs being launched in calendar year 2010. This influx can largely be attributed to the current level of high yields seen on debt papers like Certificate of Deposits (CDs) Commercial Papers(CPs), etc. on account of factors like high inflation, continuous increase in interest rates by RBI and the tight liquidity situation in the economy.
The tight liquidity situation has been caused by the fact that banks have been borrowing huge amounts of money from RBI in the last few months as their cash holdings were used by individuals and corporates to buy 3G Licenses, IPOs/FPOs offered by Public Sector Companies and also for Advance Tax Payments.
In this scenario, the short-term rates have shown an increase, which makes FMPs an attractive option to those investors with a time horizon ranging between 3 months and 2 years.
Benefits of FMPs
FMPs are generally used by large investors and companies as an alternative to Fixed Deposits (FDs). This is due to the added advantage of tax efficiency and better return prospect.
A combination of the above mentioned factors makes FMPs our recommendation to investors as an alternative to FDs.This will ensure that the investors capture high yields in the rising interest rate scenario.
For a moment, let us assume that a 1 year FMP generates the same return as a 1 year FD. In that case, the post-tax yields delivered by both these instruments are outlined below.
A study of the recently closed FMPs reveals that a portfolio of these funds is mostly concentrated in the CD and CP space.
Consider a Hypothetical case: If I was a Fund Manager and bought the following instruments then the yield from these will be as given below:
*9.25 % is the current rate on an FD from Karnataka Bank for tenure of 1Year.
Certificate of Deposits are financial instruments issued by bank to meet short-term requirements.
Commercial Papers are instruments issued by Corporates to meet their working capital requirements and others short-term need
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