If one were to look at the AMFI data for the last few months, the biggest redemptions in debt funds have occurred in the fixed maturity plans (FMP). For the month of May 2019, FMPs saw net redemptions of nearly Rs.1800 crore. Of course, this is nothing compared to what we saw in other months post October 2018 when the IL&FS and DHFL crisis first broke out. But the pressure remains and it remains to be seen if the general trust of the investors at large remains or is gradually diminishing. Here is what you need to know about the FMP crisis and how it is impacting flows.
How FMP crisis panned out and what it means?
Here is what you need to know about the FMP crisis and its implications for the mutual fund investors at large.
- It all began when investors in Fixed Maturity Plans (FMPs) from two of India’s leading mutual fund houses were in for a rude shock. This happened after they were intimated that the proceeds/returns they were expecting on their maturing schemes wouldn’t be immediately forthcoming.
- This crisis was largely attributed to the exposure that both these funds had taken on the bonds of IL&FS group and the Essel Group. Among the funds that were involved, Kotak Mutual Fund repaid the principal and offered to pay returns later but that was subject to realisation of debt. On the other hand, HDFC Mutual Fund sought investor permission to extend its maturity date by a year.
- For the mutual fund investors, who had already imagined that FMPs were like bank deposits, it came as a rude shock. Nearly, 20% of MF debt investments are in private debt and a very big chunk running into billions of dollars is of stressed companies lying in the books of FMPs. The problem began when Essel Group had raised NCDs in the name of Edison Power by pledging the promoter shares in two of their listed entities viz. Zee Entertainment and Dish TV.
- With the Essel loans almost turning sour, the Essel group promoters had no choice but to ask for a standstill on invoking those pledges. Mutual funds also did not have a choice and have given the cash-strapped Zee group promoters time until September to meet their repayments.
- The reason this problem could be much larger than is visible currently is that this could be just the proverbial tip of the iceberg. Based on the latest portfolio disclosures by mutual funds, FMP investors in 56 schemes across 6 fund houses are exposed to the debt paper of Essel and IL&FS.
What this FMP default means for debt fund investors?
We are back to the question of reading the fine print. Unlike what most investors believed, FMPs are anything but assured return schemes. They carry market risk and that was highlighted amply in this case. Here is what investors in FMPs need to know.
- They need to remember that FMPs are not assured return schemes and hence there is no legal recourse. Such cases are part of the contract fine print, especially when fund managers do not have a choice.
- For investors, it becomes a question of trust on the fund and the fund managers because the question is why the funds invested in Essel paper and informed about the problems in redemption to the investors only at the last minute.
- There is a practical problem for those who are relying on FMPs as part of their financial plan for meeting short term goals or medium term milestones. Timely intimation would have allowed investors to plan their finances better.
- Mutual fund managers need to really question if they have acted in the larger interests of the unit holders. The question is whether the extra returns they’re chasing through promoter loan-against-share deals were really worth the risk. The case of Essel proves that the collaterals were not only insufficient but also left the unit holders holding the baby for no fault of theirs.
- Finally, this episode also raises issues about the role of trustees. Ideally, the board of trustees are supposed to be an independent body meant to protect the interests of the unit holders. One can look forward to greater SEBI regulations on this front.
FMP redemptions have perhaps been held up because investors currently don’t have a choice and they cannot afford to forsake returns. But the weak inflows into FMP s clearly show that it is a case of credibility in question.
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