Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
No 'Fixed Maturity' For FMPs? - Outside View by PersonalFN

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

No 'Fixed Maturity' For FMPs?
Apr 16, 2019

FMPs are supposedly one of the safest categories of debt funds. But bad investment decisions have come back to haunt Fixed Maturity Plans (FMPs) for sure!

It's true that a sharp pain in your chest isn't necessarily a heart attack and could be diagnosed as Acid reflux or Gas, but that doesn't mean investors are overreacting to the industry's problems.

Some players want to portray that it's just a temporary hitch; there isn't major trouble as such.

In the light of recent developments, can any sensible investor feel the same about FMPs?

Here's the trouble...

Leading fund houses of the country have either withheld some of the redemption amount due on their maturing FMPs or planned to roll them over.

If you're wondering about the reasons...

For starters, Essel group (Zee-group) companies have failed to honour their debt repayment.

According to The Hindu Business Line dated 10 April 2019, the mutual fund industry has an exposure of over Rs 8,000 crore to debt issued by Subhash Chandra, founder of the Essel group.

Approximately 55 FMPs collectively have an exposure of over Rs 1,700 crore.

So far, the mutual fund industry has refrained from selling the shares of Zee Entertainment, offered as collateral. The mutual fund houses have allowed Essel group promoters time until September 2019.

This is another instance of the mutual fund industry caught napping. If you recollect, the IL&FS and DHFL fiascos had terrified debt fund investors in the second half of 2018.

FMPs with exposure to Essel group debt...

Kotak FMP Series 183

Kotak FMP Series 187 (1146 Days)

Kotak FMP Series 189 (1154 Days)

Kotak FMP Series 193 (1098 Days)

Kotak FMP Series 194 (1099 Days)

HDFC Fixed Maturity Plans - Series XXXV - 1148 Days - Feb 2016 (1)

HDFC Fixed Maturity Plans - Series XXXV - 1148 Days - Feb 2016 (2)

HDFC Fixed Maturity Plans - Series XXXV - 1161 Days - Feb 2016 (1)

HDFC Fixed Maturity Plans - Series XXXV - 1168 Days - Feb 2016 (1)

What the FMP episode highlights?

  • Mutual fund houses might have relied on the creditworthiness of prominent business groups without due diligence.
  • They invested aggressively during the good times of the credit cycle.
  • Possibly, they also relied excessively on the credit ratings assigned by the independent credit rating agencies.
  • Mutual fund houses seem to have disregarded the risk profile of scheme category. FMPs, until now, were considered as one of the safest options due to fixed-tenure. They always carried a low-interest rate risk. But the on-going episode has highlighted that the default risk can be a more significant danger than the interest rate risk for debt fund investors.
  • The astonishing part is mutual fund houses unanimously decided to give a long rope to the promoter groups of troubled companies. Weren't the recurring mismatch in cash-flow on their balance sheets evident for a long time?
  • Mutual funds asking for the rollover of FMPs and taking their investors for granted. Aren't they first supposed to act in the interest of investors?
  • The present situation also raises questions about who will be responsible for the potential loss, if the Essel group promoters fail to sell their stake in the Zee Entertainment even by September 2019.

Lessons for investors...

If you carefully observe, FMPs that have held back a part of redemption payment on account of Essel group differing repayment commitments or have proposed to roll them over, are long tenure FMPs. And if you know, FMPs work as close-ended accrual funds, meaning, they hardly churn their portfolios.

It is possible that when these FMPs invested in Essel group debt about 2-3 years ago, the problems within the group may not have been evident or there may have not been financial problems at all.

This is the only benefit of the doubt investors might want to give to mutual fund houses. Are mutual funds going to compensate investors with any additional returns for waiting until September 2019?

This reinforces the fact that long-term debt funds carry more risk. They can be more prone to defaults as well as are more sensitive to the interest rate movements in the economy.

[Read: Is Your Investment In Debt Mutual Fund At Risk?]

Capital Market Regulator has swung into action immediately

In the view that the FMP fiasco could set the wrong precedent to other mutual fund categories, the capital market regular has already started probing the matter.

According to Mint dated 13 April 2019, Capital Market Regulator has called for a response from Kotak Mutual Fund on which provisions allowed it to withhold redemption proceeds of FMPs. Also, the regulator has demanded an answer from HDFC Mutual Fund on what will happen if it fails to get the consent of all investors to rollover FMPs.

If FMPs lose the favour of investors as a tax-efficient product, mutual funds might not be able to garner much Assets Under Management (AUM) in future through FMPs.

It will be interesting to follow the response of the mutual fund houses to the current FMP woes. Until then, relax! FMPs have just reached the hospital for a thorough check-up. No heart attack reported yet.

Editor's note: We have a ready solution for you if you are looking at high rewards with moderate risk: PersonalFN's Premium Report, "The Strategic Funds Portfolio For 2025(2019 Edition)".

In the 2019 Edition of PersonalFN's Premium Report, "The Strategic Funds Portfolio For 2025", you will get access to a ready-made portfolio of top recommended equity mutual funds for 2025 based on the core & satellite approach to investing. These mutual fund schemes have the ability to generate lucrative returns over the next 7-8 years. Subscribe now!

Author: PersonalFN Content & Research Team

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "No 'Fixed Maturity' For FMPs?". Click here!


More Views on News

Is HDFC Mutual Fund Absorbing Losses Out Of Compulsion? (Outside View)

Jun 19, 2019

PersonalFN explains why probably HDFC Mutual Fund decided to bail out its FMPs.

My Upcoming Stock Recommendation, Backed by Aberdeen Standard Investments, Scores 9.1/10 (The 5 Minute Wrapup)

Jun 19, 2019

This month's Smart Money Secrets recommendation is from global super investor - Aberdeen Standard Investments.

How To Check If A Mutual Fund Scheme Is A Consistent Performer Or Not (Outside View)

Jun 19, 2019

PersonalFN explains how you can check consistency of mutual funds to select the right fund.

I've Identified the Winners from the NBFC Crisis with Price Action (Profit Hunter)

Jun 19, 2019

Here's a list of banks and NBFC's which could emerge as winners over the next few years.

Bond Yields Hit New Lows - Should You Worry? (Fast Profits Daily)

Jun 19, 2019

Indian bond yields at 2017 lows. How are you impacted?

More Views on News

Most Popular

7 Stocks That Will Remain Evergreen in this Era of Technological Disruption(The 5 Minute Wrapup)

Jun 13, 2019

We are living in an era of disruption. Are your stocks well equipped to adapt to changes that disruption will bring along?

The Great Indian NBFC Bubble Has Burst but I Will Still Recommend These Safe NBFCs(The 5 Minute Wrapup)

Jun 11, 2019

One chart that predicted the NBFC crisis back in 2016.

Just One Stock Made Buffett Billions - And Can Make You Crores(Profit Hunter)

Jun 6, 2019

Coca Cola is arguably one of Warren Buffet's best stock picks. But did you know that small investors picked up the stock five decades before Buffet? Read on...

Kenneth Andrade Would Like Our Real Estate Stock Recommendation with Triple Digit Upside(The 5 Minute Wrapup)

Jun 12, 2019

This real estate stock recommended in Smart Money Secrets offers the most favourable upside potential.

Why Modi 2.0 Will Be Great for These 7 Stocks(Profit Hunter)

Jun 10, 2019

The government's focus on Infra, electricity, water for all will be the key factors for Sensex 1,00,000.


Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms


Jun 19, 2019 (Close)