3 reasons why you should not rollover your FMPs now

Share on whatsapp
Whatsapp share
Share on twitter
Tweet it out
Share on facebook
Share on FB
Share on linkedin
Post on LinkedIn

A recent addendum by Aditya Birla Sun Life suggested that investors rollover some of the AMC’s FMPs that are maturing. The reason was that given the low-rate scenario, investors are unlikely to get good interest rates outside once they exit. And that staying invested would provide indexation benefit for capital gains and earn higher returns.

But some investors raised the doubt on whether the FMPs under question were in trouble. We therefore looked at their portfolios. They had high-quality AAA-holdings that are unlikely to have had any pressure on repayment. In other words, there does not appear any credit-related rollover compulsion.

fmp

Still, we think it is not a good idea to rollover your FMPs in general, and specifically at this juncture. Know why, in this article.

#1 Rate cycle matters for FMP

FMPs lock into interest rates because they are held-to-maturity instruments. They cannot change their duration. They cannot change the underlying instruments to add higher-coupon earning papers if they come up after the FMP is launched.

Yes, it is true that even at this juncture, FMPs may lock into corporate bonds that yield higher than FDs. But that need not be particularly more beneficial for you for the following reasons:

  • One, the 1–2-year spread (excess over government securities) for AAA corporate bonds is only 60-65 basis points. 2-year G-secs are currently at 4.7%. So, you cannot expect to be locked into significantly higher rates in AAA-corporate bonds considering the current spread. The spread gets wider (almost 180 basis points) only if the portfolio has instruments that are AA or below rated (in other words, credit risk).

Simply put, the 3-year returns (which is 7.5-7.9%) from the 3-year FMPs with AAA-rated portfolio may not hold up if your FMP extends the maturity by, say, 2 years. So, if you rolled over believing that you would be able to get similar or higher returns, you may be disappointed.

  • If you believe that rates will go up from here, you are better off investing in open-ended ultra-short or short duration funds where the yield reset (from the higher rates that papers would carry) will be quicker and higher. Or you may wait it out with very short-term FDs and enter these shorter duration funds when there is clear sign of uptick in rates. This way you can avoid any short-term mark-to-market losses.
  • If you believe that rates will remain stagnant as the RBI tries to keep the yield rise at bay, then you are still better off waiting it out with open-ended shorter duration funds than locking in and missing out on any yield hike, say a year later.
  • Whether you invested in a shorter duration fund or even a longer duration corporate bond, the fund can add higher yielding papers (redeploying fresh money and existing papers that mature) and up your overall returns through accrual (interest income). This is not possible with an FMP.

To sum up, when you have the option of waiting for higher yields, there is not much reason to lock into current rates now.

#2 Not knowing the credit risk

Many investors who lock into FMPs are not aware of the credit risk profile of the FMPs. FMPs do state this upfront in their scheme information document. For example, check the SID of Nippon India FHF 40 – Series 8. The SID has stated that the FMP will invest 75-80% in A-rated instruments and 20-25% in AA-rated papers! No high quality here! This fund house has exposure to B+ rated Vodafone Idea, the defaulted paper of Altico Capital and many other high credit risk papers. This FMP matures only in May 2022, but we are just using this as an illustration to show that FMPs do carry credit risk as well.

Of the FMPs currently active, papers below AA+ account for only 10% of the total AUM of these FMPs. However, there are individual funds with high exposure. But if you invest in the FMP knowing that you’re taking credit risk (since the FMP declares it upfront), why should you worry?

Because, if you were to rollover funds with such high-risk papers, you would not know whether the fund house was under compulsion to rollover due to repayment issues. Even as it is risky to lock into such high-risk papers for the first time, you may be stretching your luck too far by doing it once more. Here is a list of FMPs (active ones) their exposure to papers below AA+ with FMP maturity.

This list may not be an all-comprehensive one (as we have downloaded this from our MF database) but will give you an idea of why you should check portfolio before taking a call to rollover, in any rate cycle.

#3 Idea of FMP

When you invest in an FMP, the idea is to typically align your goals with that of the FMP’s tenure and use the money for what you had originally intended. Or you invest because you want to lock into favourable rate movements (typically when rates peak). When the current scenario (of roll over) does not offer either of these, taxation should not be the only reason for you to again lock into it and curtail your liquidity. Even if you did have an extended timeframe and did not intend for the FMP to meet a need, there is certainly nothing that prevents you from going to open-ended funds that will suit your tenure and provide liquidity.

You need to be aware that retaining your assets would be a primary goal of any fund house when you are advised to rollover. But that need not be your objective!

Share on whatsapp
Share via Whatsapp
Share on twitter
Tweet it out
Share on facebook
Share on FB
Share on linkedin
Post on LinkedIn

More like this

Please note that any specific queries on any of our recommendations will be answered ONLY through email. If you are a subscriber, please mail contact@primeinvestor.in.  Only general queries or discussions will be answered through the comment section of the blog. For full details, please refer to this post – How to communicate with PrimeInvestor.

1 thought on “3 reasons why you should not rollover your FMPs now”

  1. Solid arguments. Thanks once again for standing by the retail investors – there is so much noise out there and you guys declutter it nicely.

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

The essence of PrimeInvestor

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

Legal Disclaimer : PrimeInvestor Financial Research Pvt Ltd (with brand name PrimeInvestor) is an independent research entity offering research services on personal finance products to customers. We are a SEBI registered Research Analyst (Registration: INH200008653). The content and reports generated by the entity does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. All content and information are provided on an ‘as is’ basis by PrimeInvestor Financial Research Pvt Ltd. Information herein is believed to be reliable but PrimeInvestor Financial Research Pvt Ltd does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. The services rendered by PrimeInvestor Financial Research Pvt Ltd are on a best-effort basis. PrimeInvestor Financial Research Pvt Ltd does not assure or guarantee the user any minimum or fixed returns. PrimeInvestor Financial Research Pvt Ltd or any of its officers, directors, partners, employees, agents, subsidiaries, affiliates or business associates will not liable for any losses, cost of damage incurred consequent upon relying on investment information, research opinions or advice or any other material/information whatsoever on the web site, reports, mails or notifications issued by PrimeInvestor Financial Research Pvt Ltd or any other agency appointed/authorised by PrimeInvestor Financial Research Pvt Ltd. Use of the above-said information is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. All intellectual property rights emerging from this website, blog, and investment solutions are and shall remain with PrimeInvestor Financial Research Pvt Ltd. All material made available is meant for the user’s personal use and such user shall not resell, copy, or redistribute the newsletter or any part of it, or use it for any commercial purpose. PrimeInvestor Financial Research Pvt Ltd, or any of its officers, directors, employees, or subsidiaries have not received any compensation/ benefits whether monetary or in kind, from the AMC, company, government, bank or any other product manufacturer or third party, whose products are the subject of its research or investment information. The performance data quoted represents past performance and does not guarantee future results. Investing in financial products involves risk. Investments are subject to market risk. Please read all related documents carefully. As a condition to accessing the content and website of PrimeInvestor Financial Research Pvt Ltd, you agree to our Terms and Conditions of Use, available here. This service is not directed for access or use by anyone in a country, especially the USA, Canada or the European Union countries, where such use or access is unlawful or which may subject PrimeInvestor Financial Research Pvt Ltd or its affiliates to any registration or licensing requirement.

Aditya Birla Mutual FundAxis Mutual Fund Baroda Mutual FundBNP Paribas Mutual FundBOI AXA Mutual FundsCanara Robeco Mutual FundDSP Mutual Fund Edelweiss Mutual FundEssel Mutual FundFranklin Templeton Mutual FundHDFC Mutual FundHSBC Mutual FundICICI Mutual FundIDBI Mutual FundIDFC Mutual FundIIFL Mutual FundIndiabulls Mutual FundInvesco Mutual FundITI Mutual FundKotak Mahindra Mutual FundL&T Mutual FundLIC Mutual FundMahindra Mutual FundMirae Asset Mutual FundMotilal Oswal Mutual FundNippon India Mutual FundPGIM Mutual FundPPFAS Mutual FundPrincipal Mutual FundQuant Mutual FundQuantum Mutual FundSahara Mutual FundSBI Mutual FundShriram Mutual FundSundaram Mutual FundTata Mutual FundsTaurus Mutual FundsUnion Mutual FundsUTI Mutual FundsYes Mutual Funds

Equity: Large Cap Funds | Mip Cap Funds | Large And Mid Cap Funds | Small Cap Mutual Funds | Contra Mutual Funds | Dividend Yield | Focused Mutual Funds | Find Top Index Funds | Best Sector Funds | Thematic Mutual Fund | Best Value Mutual Funds | Equity Linked Savings Scheme | Tax Saving Funds
Debt: Banking And PSU Funds | Corporate Bond Funds | Credit Risk Funds Mutual Funds | Dynamic Bond Funds | Floating Rate Funds | Gilt Mutual Funds India | Find Top Liquid Funds In India | Long term debt funds | Low Duration Funds Debt Funds | Medium Duration Debt Funds | Medium To Long Duration Funds | Money Market Debt Funds | Overnight Debt Funds | Short Duration Debt Funds | Ultra Short Term Debt Fund
Hybrid: Aggressive Hybrid Funds | Arbitrage Mutual Funds | Balanced Advantage Mutual Funds | Conservative Hybrid Funds | Dynamic Asset Allocation | Equity Saving Funds | Multi Asset Funds | Multi Asset Allocation

Mutual fund rolling returns by category: Balanced Advantage | Conservative Hybrid Fund | Corporate Bond | Dividend Yield | Dynamic Bond | Equity Linked Savings Scheme | Floating Rate | Index Funds | Large and Midcap fund | Large Cap Fund | Liquid funds | Low Duration | Mid Cap Fund | Multi Cap Fund | Short Duration | Small cap Fund | Solution Oriented – Childrens Fund | Ultra Short Duration

Login to your account
OR