Fixed Tenure Mutual Fund Plans - FTPs vs FMPs

 

 



All mutual funds have open-ended, debt-oriented hybrid plans. Ever so often, they come out with a series of close-ended schemes, which are of fixed tenures of 3 or 5 years before which an investor cannot exit them.One of the reasons mutual funds introduce close-ended schemes is to bypass Sebi's suggestion on avoiding duplicate schemes. And since the close-ended schemes usually give a higher commission than the openended ones, distributors are only too happy to push them.

The Indian investor's behaviour also plays a role. Though financial planners always advise opting for open-ended schemes with a good track record, some investors still believe in going for the new fund offers (NFOs) because they are priced at `10 per unit. They ignore the issues associated with close-ended hybrid plans. We don't recommend these schemes because of higher costs and lock-in. Close-ended schemes may be good for the fund house because they ensure higher and stable AUM, and for the distributor who gets more commission, but not for the investors

FTPs ARE NOT FMPs

Though close-ended fixed tenure plans (FTPs) are a modified version of the fixed maturity plans (FMPs), investors need to distinguish between the two. The main difference is the small equity exposure (around 1525%) in the former. The FMPs make sense because the investors are locking in the yield on debt instruments at that point of time and therefore, have a reasonable idea about possible returns.However, the product colour changes when there is an equity portion involved, which makes future returns hard to predict.

HIGHER COST

FMPs are usually managed at wafer-thin margins and expense ratio of around 20-30 bps.However, fund houses treat FTPs like normal debt schemes and charge an expense ratio of around 1.5%. The higher commission payable to distributors is one of the reason for this.Fund houses having to active ly manage the equity portion is the other reason.

LOCK-IN

The duration of most of the schemes are 3 years or 5 years and this lock-in is the biggest disadvantage of these funds. Though all are listed on the stock exchanges, very few schemes actually get traded. Most of them also trade at a discount to their respective NAVs (see chart).  Since there is no liquidity, listing on the stock exchanges does not make sense. If you are subscribing to it, do it only if you are sure that you can hold it till maturity.

TAX DISADVANTAGE

Let us assume that you want to have an equity exposure of only 20%. Does that mean you can go with these FTPs? No. That is because the FTPs are counted as debt products for taxation purposes.You have to pay tax on the long-term capital gain from the equity portion, which is otherwise tax free. However, this tax disadvantage may not be a major deterrent for who are not in the tax bracket. These are retail products and are usually picked by retired people who are not in the tax bracket. There are also other reasons to keep the equity and debt portfolios separate. Investors should do keep their equity and debt portion separately . In addition to the tax benefit on equity , investors can manage the debt more efficiently depending on the market situation.

WORKS ONLY FOR A SMALL GROUP

While this category is not suitable for most investors, it is beneficial for a very small group. FTPs are useful for investors who don't have any understanding of the equity market and are not ready to bear any losses, while needing slightly higher returns than the debt product. If they manage the equity and debt portfolios separately, there will be periods where equity will give negative returns, which this set of investors are not comfortable with. Since there is a debt cushion, the lower side of the return range is usually at around 5-6% returns and higher end at around 10-11%

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