FMP update

Here are some more launches of FMP that are available in the market at this point of time

Please read the following blogs to get details about what an FMP is and its advantages

1. Why invest in Fixed maturity plans ?

2. Fixed Maturity Plan - FAQ

Lotus India Fixed Maturity Plans- 375 Days-Series V

Objective: The objective of the scheme is to generate income by investing in a portfolio of debt and money market instruments normally maturing in line with the duration of the scheme.

Asset Allocation: The fund will invest 0%-100% in money market instruments including reverse repo. The investment in government securities issued by the central government and/or state government(s) will be 0%-50%. The fund will invest 0%-100% debt instruments such as bonds and debentures. The investment in securitised debt will be up to 50%. The investment in fixed income derivatives will be up to 50%.

Fund Opens: 12 November 2007
Fund Closes: 20 November 2007
Face Value: Rs 10

Investment Options: Lotus India Fixed Maturity Plan - 375 Days - Series III offers two plans i.e. retail & institutional. Both plans offer two options i.e. dividend reinvestment and growth.

Entry Load: There will no entry load charged for the scheme due to its close-ended structure.

Exit Load: The scheme charges an exit load of 3.00%, if the investment is redeemed before the maturity date. Whereas there will be no exit load charged on the redemption made on or after the maturity date.

Minimum Investment Amount: Minimum investment under retail plan is Rs 5,000 and in multiple of Re 1 thereafter. Minimum investment under institutional plan is Rs 50 lakh and in multiple of Re 1 thereafter.

Benchmark Index: CRISIL Short Term Bond Fund Index.


KOTAK FMP 3M SERIES 26

Tenor - 90 Days

Fund Opens - 12 November 2007
Fund Closes - 14 November 2007
Face Value - Rs 10

Investment - Minimum Rs. 5000/- (Rupees Five Thousand only) and in multiple of Re. 1 each for both Growth & Dividend options

Options - Growth, Dividend Reinvestment and Dividend Payout

Entry Load NIL

Exit Load 1 % if redeemed before the maturity date. However, if an investor wants to switch his investments from one option to other option under the same scheme during the tenure of the scheme, no exit load will be charged

FMP Update

Here are some more launches of FMP that are available in the market at this point of time

Please read the following blogs to get details about what an FMP is and its advantages

1. Why invest in Fixed maturity plans ?

2. Fixed Maturity Plan - FAQ

LICMF Fixed Maturity Plan Series 32
Tenure: 13 Months
Offer open: September 20, 2007
Offer closes: September 27, 2007
Schemes: Growth, Dividend Payout and Reinvestment
Minimum investment: Rs 10000
Cost per unit: Rs 10

DSPML Fixed Term Plan - Series 3H
Tenure: 12 Months
Offer open: September 14, 2007
Offer closes: October 10, 2007
Schemes: Growth and Dividend Reinvestment
Plan: Regular and Institutional
Minimum investment: Rs 25000 (Regular Plan) and Rs 1 crore (Institutional Plan)
Cost per unit: Rs 1000

Yet another FMP Update

Here are some more launches of FMP that are available in the market at this point of time

Please read the following blogss to get details about what an FMP is

1. Why invest in Fixed maturity plans ?

2. Fixed Maturity Plan - FAQ

DSPML Fixed Term Plan - Series 3 F
Tenure: 12 months
Offer Open: August 31, 2007
Offer Closes: September 10, 2007
Plan: Regular and Institutional
Schemes: Growth and Dividend Reinvestment
Minimum Investment: Rs 25,000 (for regular plan) and Rs 1 Cr (for institutional plan)
Cost Per Unit: Rs 1000

Sundaram BNP Paribas Fixed Term Plan Series XXXII
Tenure: 375 days
Offer Open: September 3, 2007
Offer Closes: September 6, 2007
Schemes: Growth, Dividend Reinvestment and Payout
Minimum Investment: Rs 5000
Cost Per Unit: Rs 10


ABN Amro Fixed Term Plan - Series 9
Tenure: 3 Years
Offer Open: Aug 29, 2007
Offer Closes: September 17, 2007
Schemes: Growth, Dividend Reinvestment and Payout
Minimum Investment: Rs 25000
Cost Per Unit: Rs 10

FMP Update

Here is another launch of an FMP and this time it is from ING Vysya Mutual Fund

Please read the following blogss to get details about what an FMP is

1. Why invest in Fixed maturity plans ?

2. Fixed Maturity Plan - FAQ

ING Fixed Maturity Fund - Series XXXII
Tenure: 368 Days
Offer open: August 30, 2007
Offer closes: September 10, 2007
Plan: Retail and Institutional
Schemes: Growth Dividend and Bonus
Minimum investment: Rs 5000
Cost Per Unit: Rs 10

RBI credit policy on 31st July

The next RBI credit policy is on 1st August. This is possible the most defining momement in the economic history our our country. The recent events are making the outcome of the credit policy very interesting and is keeping everyone guessing (Related news at RBI may not change rates, inflation under watch and Corporates foresee fall in rates: Survey ). Here are a few events that have to be considered by the RBI

1. The month of July witnessed USD 5 Billion invested in our stock market by Foreign Institutional Investors (FII).

2. The stock market cracked over 550 points in one day on 2th July following concerns on the corrections in the international markets led by the US. Read more and related news at Markets likely to correct further next week

3. The Indian Ruppee cracked 17 paise to move from Rs 40.34 to a US dollar to 40.51 causing a fair bit of appreciation for a single day.

4. India Inc growth at 5-quarter low - Read related news at India Inc growth at 5-quarter low

5. Crude prices soar above 77 dollars a barrel - Read related news at Crude prices soar above 77 dollars a barrel

Meanwhile, the banks have started decreasing their interest rates for their deposits. See related news at Fixed deposits to earn lower interest.... These moves by the banks are causing a fall in the rates offered by FMPs - Are FMPs losing their sheen?

Some more recent launches of FMP

Here are the some more Fixed Maturity Plans (FMPs) available in the market for subscription:

Please read the following blogss to get details about what an FMP is

1. Why invest in Fixed maturity plans ?

2. Fixed Maturity Plan - FAQ

LICMF Fixed Maturity Plan Series - 27
Tenure: 3 Months
Offer open: July 18, 2007
Offer closes: July 23, 2007
Schemes: Growth, Dividend Reinvestment and Dividend Payout
Minimum investment: Rs 10, 000
Price per unit: Rs 10
Entry load: Nil
Exit load: 0.50% if redeemed before maturity

LICMF Fixed Maturity Plan Series - 31
Tenure: 13 Months
Offer open: July 18, 2007
Offer closes: July 31, 2007
Schemes: Growth, Dividend Reinvestment and Dividend Payout
Minimum investment: Rs 10, 000
Price per unit: Rs 10
Entry load: Nil
Exit load: 1.50% if redeemed on or before 180 days and 1% if redeemed after 180 days but before maturity.

ICICI Prudential FMP - Series 38 - One Year Plan B
Tenure: 370 days
Offer open: July 13, 2007
Offer closes: July 23, 2007
Plans: Retail and Institutional
Schemes: Growth and Dividend
Minimum investment: Rs 5000 (retail) and 2 Cr (institutional)
Price per unit: Rs 10

Can FMP Series 1 M Series II
Tenure: 1 Month
Offer open: July 12, 2007
Offer closes: July 24, 2007
Schemes: Growth and Dividend
Minimum investment: Rs 5000
Price per unit: Rs 10
Entry load: Nil
Exit load: 1% if redeemed before the maturity date

ICICI Prudential FMP - Series 38 - Two Year Plan
Tenure: 740 days
Offer open: July 19, 2007
Offer closes: July 31, 2007
Plans: Retail and Institutional
Schemes: Growth and Dividend
Minimum investment: Rs 5000
Price per unit: Rs 10

Indian Bank to cut interest rates from 18th July

Indian Bank will cut interest rates for the 181-365 day deposits by 175 bps to 7% from 18th July. As indicated in my blog dated 29th June Inflation at 4.28%, Hits 14-month low, the impact of the lower inflation rates are slowing making banks reduce the deposit rates and lower home loan rates as well (Pls see ICICI Bank cuts home loan rates by 25-50 bps). There were other news also about the yields dropping for the new fixed maturity plans that were being issued in the recent past when compared with the yields of the recent past.

However, if the international interest rates increase, there is again the possibility of domestic interest rates increasing in tandem with the global rates. We will have to wait and watch.

Comparsion of Bank FD, Debt Mutual Fund and FMP

Now that you have an idea of the Debt fund and FMP, here is a small article on comparing the various instruments and trying to identify which one is the right one for you.

Bank FD
1. Ideal for those in low income tax bracket or no income tax bracket.
2. Ideal for those who want to take no risk at all i.e. who consider that depositing at SBI or ICICI is safer to give than L&T (AAA rated company) through a mutual fund.
3. Ideal for those who are not conversant with the concept of mutual fund and do not want to understand what a debt Mutual fund.
4. Ideal for those who deposit fr a period of 5 year to get the Sec 80C income tax benefit (Indian Income tax rules allow bank deposits for 5 years and above to be treated as an investment for the purpose getting income tax rebate).
5. Ideal for those who do want liquidity but want to be able to get back the principal without any loss.

FMP
1. Ideal for those who think that the interest rates have peaked out for the near future or nearing the peak and want to lock on the yield that one will get for a long period of time. They believe that interest rates will start falling from now on.
2. Ideal for those who do not want liquidity and can wait till the maturity period of the FMP.
3. Ideal for those in the high income tax bracket but want an instrument close to that of a bank deposit.
4. Ideal for investors who are atleast looking at a period of more than 1 year though there is still some benefit for investors investing in FMPs of maturity of less than 1 year but not as much as those investing for more than 1 year.

Debt Mutual
1. Ideal for those who believe in Systematic Investment plan and are looking really long periods of time for their returns so that the good times and bad times get averaged out.
2. Ideal for those who are sure of the time period of their investment
3. Ideal for those who think that the interest rates are peaked out or nearing the peak and want to get high returns by timing the market where they believe that the interest rates will fall fast enough for them to get the capital gains (see my blog on Effect of interest rates on Debt Mutual Fund
4. Ideal for those in an interest rate regime where the interest rates are seen to fall in the future.

So which one should you invest in ??

My take is that one will have to ensure that the portfolio of debt is continuously monitored based on the dynamics of the market and move the funds accordingly.

Right now, I would urge each of you to lock your funds in FMPs of 24-36 months maturity periods.

Here are a few FMPs that are open as of now
1. JM FMF- Sr V- Qtrly 5 - RP (G) from JM Mutual Fund
2. Lotus India FMP-1 month and 3 Series (extended till July 31st)

As the saying goes "Do not put all the eggs in one basket" and have a debt portfolio that best represents you in the current scenario.

Debt Mutual Funds - Part 2

Today we will see what risks exists in debt mutual funds. But before, that it is important for one to understand how debt mutual funds are priced and how the NAV is determined.

Let us assume that there is a company called TCD & Co. Let us say that this is rated by CRISIL and ICRA (rating organizations) as AAA (don't worry about what rating is right now. I will write about sometime in the future to explain its significance). For the moment assume that AAA is very safe and there is a high chance of the money that you give as loan to the company will come back to you and also the interest that the company promises to you will be given. Now at this point of time, if the Government were to borrow money from the public they may give 8% p.a. (Ex NSS, NSC etc), probably TCD & Co may have to pay 8.5% p.a. to attract lenders and also since it is not as safe as the Government of India, let us assume that rate of 8.5% p.a. is the market rate for AAA companies.

So, TCD & Co will issue a bond such that if you lend them (read as invest) Rs. 921.65 today, they will return you Rs. 1000 after one year. This means that the return on investment on Rs. 921.65 for one year is 8.5%.

Thus as we move closer to the maturity date, this value of the bond issued at Rs. 921.65 will slowly start increasing proportionately such that the return will always be 8.5 p.a. for the remaining number of days to maturity.

Now comes the tricky situation when the is a increase in interest rates by the Reserve bank of India (we will see in future why the Reserve bank of India changes the interest rates, impact of that on inflation etc). Let us say that the interest rates increase by 0.5% p.a. after 6 months from the date of issue of the bond by TCD & Co.

After 6 months, if there was no change in interest rates, the bond price would have increased from Rs. 921.65 to approximately Rs. 959.2. However, now we have an increase in interest rates. Thus for the same bond to give a maturity value of Rs. 1000 in 6 months (remaining period of time to maturity), this value of Rs. 959.2 (current price of the bond) has to decrease slightly to Rs. 956.9 so that it gives a rate of 9% p.a. for the remaining 6 months. The reason that the bond price has to decrease is because, if the same TCD & Co were to issue a new bond for 6 months when the rates have increased such that the maturity value is Rs. 1000, then it would have priced it at Rs. 956.9.

Similarly if the interest rates had decreased by 0.5 % p.a. then the price of the bond would have increased accordingly.

The rating of the company (AAA for TCD & Co) also plays a big role in the return that a bond returns.

Thus we see that there is an inverse correlation between the bond prices and the interest rates. Similarly the impact of the increase or decrease in bond prices is bigger for those bonds where the time left for maturity is longer i.e. a bond that has 6 months to mature will change much lower than a bond that has 60 months to mature

There the most important factors that decide the price of a debt security are

Prevailing interest rate scenario
Maturity period

Interest rates are not constant at all. They in turn are dependent on a whole range of macro and micro economic factors. Tracking this is a highly complex and sophisticated exercise.

Also as a thumb rule, take the following

1. In a scenario where the interest rates are increasing, the bond prices will fall and the fall will be bigger if the time left for maturity is longer i.e. longer term debt funds have a bigger impact.
2. In a scenario where the interest rates are decreasing, the bond prices will increase and the rise will be bigger if the time left for maturity is longer i.e. longer term debt funds have a bigger impact.
3. If the debt funds invest a significant proportion of the money in instruments that have a relatively poor rating (say A or A- or BBB+ etc) then there is a default risk of the company that borrowed the money not being able to return the money and hence that money is lost.

Thus when the underlying bond prices increase or decrease, the NAVs get affected and therefore the returns from the debt funds also get affected accordingly.

It is essential for investors to match their investment horizon with that of the debt fund and also understand the mix of portfolio to see what can happen in case of change in interest rate during the period of investment.

Debt Mutual Funds - Part 1

What is a Debt Mutual Fund ?

A debt mutual fund is a mutual fund that aims to provide regular and steady income to investors by investing in bonds, corporate debentures, government securities and money market instruments such as treasury bills, certificate of deposits, etc. They are ideal for investors who don’t want to take much risk but want steady returns comparable to that of Bank deposits. Many investors invest in debt mutual funds instead of bank deposits because of increased liquidity, lower taxes to be paid etc. However, they are not totally risk free. We will discuss the risks associated in a Debt Mutual Fund especially in an interest regime that is volatile or increasing or decreasing in forthcoming blogs. We will also discuss the benefits of a debt mutual fund and compare it with an FMP and Bank deposit.

Given below ate the different categories of Debt Mutual Funds that address the needs of different investors depending on the time frame of their investment

Liquid Funds or Money Market Funds
These are funds that aim to provide easy liquidity, preservation of capital and modest income. Returns on these schemes do not fluctuate sharply. They are ideal for individual investors that are looking to park their funds for short periods say less than a month and at the same time having better than bank deposit returns.

Short-term debt funds
These schemes invest in debt securities with tenures of less than six months.

Medium-term debt funds
These schemes invest in debt securities with tenures of six months to one year.

Long-term debt funds
These schemes invest in debt securities with tenures of more than one year.

Gilt mutual funds
Gilt funds invest only in government securities. Government securities don’t have credit or default risk and hence they are safer than say a certificate of deposit or money market instruments of a company rated as AAA. However, NAVs of gilt funds can fluctuate with the change in interest rates and we will discuss this in the future blogs. Even Gilt mutual funds are available in the above flavors of Liquid, Short-term, Medium-term and Long-term funds.

Floating rate funds
These mutual funds invest most of their money in instruments with floating interest rate i.e. the interest on these instruments will be linked to a market benchmark and will change if the benchmark increases or decrease. That makes them ideal investment in a rising interest rate scenario.

There are also other schemes such as Balanced funds and Monthly Income Plans where there is a big chunk of debt. They also have a huge chunk of equity and hence these are not pure debt funds and hence am not covering it.

Fixed Maturity Plan - FAQ

In my previous blog, I explained as to what is an FMP. Here is a continuation of that. Some of the questions that were unanswered that probably many of you would have wanted are given below

1. How much is required to participate in an FMP ?
A - Like most mutual funds, if you have a minimum of Rs 5000, u can invest in an FMP

2. When do I know that FMPs are launched ?
A - Stay in touch with brokers like Karvy consultants, Bajaj capital, Reliance Money and other distributors and they will be able to let you know when such issues come out.

3. What is the duration of an FMP ?
A - FMPs are available for periods from as lows as 30 days to 30 months. However, you will have to keep your eyes open as to find the one that is most suitable to you.

4. What are the disadvantages of an FMP ?
A - Money is locked till the maturity. If in case you want to withdraw it prior to maturity, one will be given only a window and also there will be some foreclosure fees/penalty (usual 3-4% of the amount) and hence that makes the entire FMP unattractive.

If one is the low income tax bracket, one will have to evaluate the tax benefits of FMP was putting into a Fixed deposit and then see which of them is more tax efficient.

5. Is it safe ?
A - It is safe but no one can guarantee it. Most of the Mutual funds try and invest in various companies that are rated in the AAA category and hence technically they are as safe as a bank. Also, did u know that bank deposits are not guaranteed and have an element of risk ? They are insured only upto Rs 1 lakh. However, given the sensitivity of the issue of a bank going bust, normally the government intervenes and bails it out or asks some other bank to bail it out.

6. Will I get my money only on Maturity ?
A - If you opt for the dividend option, the mutual fund will try and make payment at regular intervals (You will have to read the prospectus or application form to see how often they will declare the dividends). Therefore, this compares well to a Fixed deposit with regular returns and fixed intervals. Also, note that the Dividend from these schemes are tax free as they get taxed by the Mutual fund themselves and is tax free at the hands of the investor.

7. Can I deposit cash ?
A No, I don’t think so. U will need to issue a draft or a cheque and the maturity amount will be made via a cheque or draft. No mutual fund company or broker canvassing the FMP will accept cash.

I have tried to answer the top FAQ. In case you have further questions, please feel free to write to me and I will answer back.

Why invest in Fixed maturity plans ?

Interest rates in India have been increasing over the last couple of years. This is good news for those breed of investors who invest in bank deposits and fixed income instruments as the interest rates have increased. Today many of the banks offer 9.5% to 10% p.a. returns over the next 3-4 years.

However, should one blindly go ahead and invest in the bank deposits right away ?. Please remember that as per Income Tax rules in India, interest earned from bank deposits are subject to income tax depending on the tax bracket that the individual is in. There are a number of indiviuals who open deposits in their wife's name thinking that these will be tax free. However, even these are expected to be combined into the income of the husband and tax has to be paid tax depending on the tax bracket that the individual is in.

Thus if the individual was in the highest income tax bracket, one would end paying more than 30% of the interest income as income tax thus reducing the effecting return to between 6.5% and 7% p.a.

This is where fixed maturity plans come in and are different from the fixed deposits.

What are fixed maturity plans?
FMPs, as they are popularly known, are the equivalent of a fixed deposit in a bank, with a caveat. The maturity amount of a fixed deposit in a bank is 'guaranteed', but only 'indicated' in the FMP of a mutual fund. The regulator does not allow fund companies to guarantee returns, and hence the 'indicated returns' in FMPs.

FMPs are debt schemes, where the corpus is invested in fixed-income securities for the tenure of the scheme. The tenure can be of different maturities, from one month to three years. These are typically close ended schemes.

The prevalent yield (equivanent rate that the money will fetch as a return for a given tenure from a AAA rated company) minus the expense ratiowill be the indicative return which can be expected from the FMP.

The reason that FMPs are more attractive is because they are more tax efficient. FMPs are classified under the debt scheme category and enjoy certain tax benefits, such as:
Dividend in the hands of the investor is tax-free. But the mutual fund has to deduct a dividend distribution tax of 14.025 per cent in the case of individuals and Hindu Undivided Families (HUFs), and 22.44 per cent in the case of corporates.

Long-term capital gains (investment of more than a year) enjoy indexation benefit.

Short-term capital gains are added to the income of the investor and taxed as per one's slab, whereas the interest on a bank deposit is added to the income of the investor and taxed as per one's slab.

Let us take an example of a 30 month FMP which, if launched now, will mature in June 2010. It will pass through three financial years. Thus, it can have a benefit of triple-cost indexation for the purpose of calculating post-tax yield.

Bank Fixed With Indexation Without Indexation
Deposit
Amount of Investment (Rs.) 10000 10000 10000
Post Expenses Yield (p.a)* 8.3% 8.30% 8.30%
Tenor (in months) 30 30 30
Approx Maturity Amt 12,075 12,075 12,075
Gain 2075 2075 2075
Indexed Cost NA 11,406 NIL
Indexed Gain NA 669 NA
Tax Rate 33.66% 22.44% 11.22%
Tax 698 150 232
Post Tax Gain 1377 1925 1843
Approx Post Tax p.a. 5.5% 7.7% 7.3%


Thus it is fairly clear that FMPs are more tax efficient than an equivalent Fixed deposit for a given period of time.