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Plans with a fixed term are far from being out of the ordinary.
Last week, Kotak Mahindra Asset Management Co. wrote to Kotak FMP Series 127 investors to tell them that it would not be able to pay the full amount of the buyout. The program, a 3-year Fixed Term Plan (FMP), was due to expire on April 8th.
That's what happened because of Kotak's exposure to the debt-laden Essel group, which is the promoter of the Zee group of companies.
According to Morningstar data, 94 FMPs have invested in Essel group companies.
HDFC Asset Management Co Ltd, which had invested Rs 902 billion in the debt securities of Essel group companies for all its FMPs, had to renew / extend the maturity of HDFC FMP 1168D Feb. 2016 (1) as part of the HDFC Fixed Maturity Plans The Series 35 was scheduled to expire on April 15, 2019. The renewal mechanism would expire on April 29, 2020 if the majority of its investors agreed to do so.
Investments in FMP have already caused stress to its investors. Let's look at the story.
Go back
Historically, corporate treasury departments were primarily attracted to FMPs to deploy their temporary cash surpluses.
This allows mutual funds to be placed in a competition in order to generate higher FMP returns compared to the banks 'FDs and competitors' MFs. As informed HNIs and retail investors joined FMP's investments, the competition for returns intensified.
During the 1990s, when cooperatives temporarily put money into bank FDs, the interest rate was set. Thus, when the MFs came to the party, they started to give indicative returns and the MFs tried to distance themselves to generate these indicative returns, in order to outperform the bank FDs and each other.
SEBI intervened and terminated the indicative yield practice because it was a phantom sales guarantee of returns – goes against the mandate that MF's investments are subject to market risk.
There was a time of high interest rate yields on corporate bonds that started from 2007 and continued for a long time, including new areas of corporate bonds such as bonds and bonds. infrastructure, NBFC bonds.
FD vs FMP
The banks' FDs could not match that level of yield, so they fell out of favor and the FMPs took a long time.
However, an in-depth reading shows that competition has increased as it now comes down to knowing which mutual fund house can generate higher returns.
To outdo themselves, the MFs tried another trick. They even agreed to keep the securities of the FMP plans beyond their maturity. At the end of the term, they transferred these unmatured matted FMP securities into another FMP program.
SEBI once again intervened to preserve the interest of investors and said that a FMP would invest in maturing securities depending on the maturity of the FMP programs. Thus, fair play between FPs has been restored. The market supervisor also made the rated papers mandatory.
Today, the rating risk is what MFIs take mainly in the MPFs.
This raises important questions – whether CF credit risk in FMPs is properly communicated to businesses, HNI investors and individuals? whether the level of credit risk is desirable or whether the CF has gone too far by investing heavily in degraded sectors such as NBFC / infrastructure and highly indebted corporate debt? and finally, are investors supported with such a high level of risk in the FMP?
In the aftermath of the recent fiasco, if mutual funds fail to solve these problems, companies may have to switch to the old world of fixed bank deposits. Not sure exactly which mutual funds to buy? Download the Moneycontrol transaction app to get personalized investment recommendations.
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