If you’ve been following the news, you’d have come across headlines about Kotak Fixed maturity Plan (FMP) not paying the proceeds upon maturity of the plan. In case, you aren’t aware that a category of fixed maturity plans existed, you aren’t alone.
Fixed Maturity Plans are one of the biggest sub-category of funds under debt funds. As of March 2019, they had 158979.11crs of AUM. Here’s the breakup of debt funds:
| INCOME / DEBT ORIENTED SCHEMES | In Crs |
|---|---|
| Liquid/ Money Market | 571095.1 |
| Gilt | 7982.99 |
| FMP | 158979.11 |
| Debt(assured return) | 0 |
| Infrastructure Debt Funds | 2735.65 |
| Other Debt Schemes | 545238.45 |
| Grand Sub-Total | 1286031.3 |
Ok, so here’s the AMFI definition of what FMPs are:
Fixed Maturity Plans (FMPs)
FMPs, as the name indicates, have a pre-determined maturity date (like a term deposit) and are close-ended debt mutual fund schemes. FMPs invest in debt instruments with a specific date of maturity, lesser than or equal to the maturity date of the scheme, also enjoy the status of debt funds. After the date of maturity, the investment is redeemed at current NAV and the maturity proceeds are paid back to the investors.
The tenure of an FMP may range from as low as 30 days to 60 months. Since the maturity date and the amount are known beforehand, the fund manager can invest with reasonable confidence, in securities that have a similar maturity as that of the scheme. Thus, if the tenure of the scheme is one year then the fund manager would invest in debt securities that mature just before a year. Unlike in other open ended funds, where one can buy and sell units from the mutual funds on an ongoing basis), no pre-mature redemptions are permitted in FMPs. Hence, the units of FMPs (being close ended schemes) are compulsorily listed on a stock exchange/s so that the investors may sell the units through stock exchange route in case of urgent liquidity needs.
Most FMPs have tenures more than 3 years to get the indexation benefit. So yeah, you buy FMP fund during the NFO (New fund offer) period and wait until the redemption period for the fund to mature and for you to receive your money back. Even though they are listed on the stock exchanges to facilitate premature exits there is ZERO liquidity in these instruments.
Why fixed maturity plans, you may ask?
When you invest in debt you will have to bear interest rate risk. This is profits/losses arising out of the movements in interest rates. But the advantage of FMPs is that they hold debt securites with tenure equal to the maturity of the fund.
So even if the interest rates in the economy where to fluctuate, FMPs are safe because, they will hold the securities until maturity and get the full proceeds.
But yeah, like all mutual funds, they also have certain risks, although they shouldn’t have.
If you weren’t following the troubles of Zee group, then here’s what had happened.
Mutual funds lent money to Essel Group (Zee) against shares. On Jan 25th, Zee Entertainment crashed 31%. All the mutual fund lenders got together and came to an agreement they they wouldn’t invoke the pledge against the shares. The reason being, if they had invoked the pledge and sold the shares to cover the loan cover, the stock price would have fallen again which ultimately would have ended up burning the investors.
These troubles were largely limited to equity schemes in Jan and Feb. Now the troubles have finally reached the doorsteps of debt funds.
Kotal Mutual Fund told investors of Kotak FMP Series 127 that they would not be repaid in full once it matured on April 8th. The reason being, Kotak hadn’t received money from 2 non convertible debentures (NCD) issued by Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd, 2 companies belonging to the Essel Group. The NCDs were backed by Zee Entertainmant shares.
This also raises the question, was the AMC justified in waiting until the last moment to inform the investors?
Now remember, the mutual funds had gotten together and told Subash Chandra, they they would hold off selling the shares. So, since they cannot sell the shares to recover proceeds, the investors are left in the lurch.
Here’s Nilesh Shah of Kotak AMC explaining the whole sordid saga
The investors will eventually receive the money, but that’s not the point. FMPs are meant for conservative investors and by the very nature, they are supposed to take limited credit risk. But hey, the investors don’t read the scheme documents and now they have to bear the brunt.
Now, this story doesn’t end here. HDFC Mutual Fund yesterday announced that it was extending the maturity of one of its FMPs that way maturing on April 15th by 280 days. Investors in HDFC FMP168D will now receive the proceeds in April 29, 2020.
87 open and close ended debt schemes have exposure to Essel Group. If you thought IL&FS was crazy, looks like things are set to get crazier.
