What is so great about Franklin Templeton Asset Management (India) Ltd launching a new fixed maturity plan (FMP)? On 20 March, it launched a new fund called Franklin India Fixed Maturity Plan Series 3 Plan D (1,132 Days).
The mutual funds industry launched 288 FMPs in FY16, 216 the year after, and 253 FMPs in FY18 so far, according to Value Research data. But Franklin Templeton’s FMP launch is different. It had shunned FMPs for many years—it’s last FMP launch before the current spree was in 2007. After launching a solitary FMP in 2016-17, it has launched nine so far this financial year. Why this sudden love for FMPs?
While retail investors largely invest in equity funds, institutional investors prefer debt funds to park short-term surpluses to get superior returns. But since their time horizon is short, these companies want safety over high returns. And that’s why, distributors tell us, companies didn’t invest in Franklin Templeton India’s debt funds as much as with other fund houses.
For the past many years, Franklin Templeton India’s debt funds have preferred to invest in corporate bonds of companies that, it feels, are well-managed but have weak credit rating. Although Santosh Kamath, managing director-fixed income, Franklin Templeton Investments, India, has government securities funds under his fixed income funds’ division, for the past many years, many of their debt funds have focused on identifying weak credit rated-companies but where they see potential—this is an area where Kamath and his team earned many bouquets and some brickbats over the years.
Franklin Templeton India is one of the top 15 fund houses in terms of fixed income assets. But about 78.9% of its fixed income assets lie in securities rated AA and lower; the most in such companies. In contrast, only 21.1% of its fixed income assets lie in government securities (G-secs).
The fund house has not been getting institutional money. Large companies have enough fund houses to choose from, such as HDFC mutual fund, Aditya Birla Sun Life mutual fund, UTI mutual fund, and so on. Corporate investors do not like to invest in bond funds that take credit risk. They want safety,” said a large distributor who did not wish to be named. This is why all of Franklin Templeton’s FMPs are focussed largely on AAA-rated or high quality assets.
While the fund house is said to be popular among retail investors, it’s handling of Jindal Steel and Power Ltd (JSPL) after two downgrades of JSPL debt papers, as well as the many debt schemes of the fund house containing low credit-rated instruments, is said to have spooked many institutional clients.
“While we have a strong product line-up in the managed credit space, we do have a few gaps in the high credit space, including closed-end funds like FMPs. We seek client feedback and review our fund range periodically; one of the requirements our customers highlighted was for high credit FMPs. Their introduction has not only helped make our product suite more holistic but has also helped us diversify our investor mix,” said Sanjay Sapre, president. Franklin Templeton Investments-India.
Fund houses typically sell FMPs to corporate investors and high net worth individuals as products that give stable and some sort of assured returns if investors stay till maturity. Also, investors don’t pay any, or minimal, taxes due to indexation benefits. This benefit inflates the cost price in line with inflation, every year.
Fund houses typically launch FMPs in February and March, before the close of an accounting year. Maturity is after a little over 3 years. The trick is to launch a 3-year FMP but the tenure should catch four financial year closings. So, a 3-year FMP launched on 20 March 2018 would mature on 5 April 2021 and thereby pass through four year-ends. The cost price of this FMP would rise four times due to indexation, which in many cases is good enough to ensure that the cost price, at least on paper and for tax purposes, is higher than the selling price. On paper, this means no profit and no or lower taxes.
“The reasons why corporate investors invest in FMPs is justified—low volatility and predictable returns. But it’s a well-marketed myth that only FMPs offer four indexation benefits. Even open-ended debt funds offer these indexation benefits,” said Joydeep Sen, founder, Wiseinvestor.in. “High net worth individuals also largely invest in FMPs purely for indexation benefits and that is lack of awareness,” he added.
What should you do?
Franklin Templeton India’s entry into the FMP market should not change the way you look at these types of funds. Open-ended debt funds also offer indexation benefits. FMPs look tempting because of prevailing yields from debt scrips, and if they are higher than normal, like in present times, then FMPs can offer good returns.livemint