The investors who do not have a specific holding period can consider schemes from this unique fund category.
Mr. NARENDRA NATHAN
Fixed maturity plans (FMPs) continue to be the flavour of the season, with mutual funds flooding the market with such offerings.
This is unlikely to change as long as the tight liquidity conditions continue. Given that the short - term interest rates are at a higher rangethe 3 -month to one-year periods are yielding annualised returns of 9 -10 % it may be prudent to lock your money right now.
The lure of FMPs is that the fund houses usually invest in debt papers that mature just before the scheme redemption date and, hence,these are free from the interest rate risk.
However,investors need to be prepared to compromise on liquidity.
SEBI banned premature withdrawal from FMPs after the 2009 FMP crisis,when a large number of investors withdrew from these plans, creating a liquidity crisis.
The FMPs listed on the stock exchanges are illiquid, says Mr. Vikram Dalal, Managing Director, Synergee Capital Services.
Since, very few transactions take place at these counters, the existing FMP investors are forced to sell them at a discount of 5 to 15 % to the NAV.
This is why FMPs are only suitable for the investors who are ready to forget about their money till the specified period.
What about the investors who want a mutual fund scheme,which can help them make the most of the short-term interest rates without worrying about a cash crunch in the face of a contingency This is where debt interval funds come into the picture.
How do interval funds work..?
Theoretically, interval funds can be placed between the open-ended & closed-ended funds.In this case, the fund will be open for subscription / redemption only for few days within the interval cycle.
For example, a monthly interval fund will be open only for few days in a month, while the annual interval funds will have a window of a few days in a year.
For example, the Birla Sun Life Interval Income Fund Annual Plan VIII doesnt have an exit option in the middle of the year. This type of interval fund is listed on the stock exchanges and, therefore, the investors have to use the exchange route if they need to get out during the tenure.
Another category of interval funds available in India are open-ended funds with a differential load structure,that is,a higher exit load if the redemption does not take place on specific dates.
These are not specifically termed interval funds,but are managed in a similar manner.For example, the TATA Fixed Income Portfolio Fund Scheme A1 will charge an exit load of 0.25 % if the redemption request is not made on the last 2 business days of any month.It is because of this featureexit allowed in the middle with a loadthat mutual fund tracking agencies such Value Research categorise them as openended FMPs.
What about the yield?
In both the cases, the portfolio is held till maturity, making it free from the interest rate risk. This means that investors can expect similar returns from both these categories if they hold them for similar periods. However, holdings are marked to market on a daily basis and, therefore, there will be volatility in NAVs in the middle for both the categories.
So, investors should avoid basing their investment decisions on historical returns. Instead, they should depend on the current running yield on debt papers of similar duration. Since, the return will be close to the expected yield at the end,investors should ignore the interim volatility.
How do they differ from FMPs?
Interval funds offer greater convenience because they are basically FMPs with an automatic rollover.While the default mode in an FMP is redemption, the default mode in an interval fund is renewal, says Mr. Anil Rego,CEO, Right Horizons.
In other words,you get the money back at the end of the tenure in FMPs. However,you have to ask for it in the case of an interval fund,otherwise it will be renewed automatically.
However, this facility also leads to a drawback.Investors should be meticulous and keep track of the opening dates, says Mr. Dalal. Since these specific dates & exit loads not only vary from scheme to scheme,but also according to the holding period,investors can not afford to park their money and forget about it.Interval funds require a more hands-on approach.
Another difference is that FMPs are new fund offerings. So, you dont have the option of considering the portfolio & have to rely on the fund houses promises.
Interval funds, on the other hand, are existing schemes and, hence, you have a portfolio to refer to.
Though there is no guarantee that fund houses will have similar portfolios after the renewal,they typically hint at the investmentsonly bank CDs or commercial papers with AAA rating,and so on.
Whats the main advantage?
No, its not liquidity. The biggest advantage is tax gain. Consider a quarterly interval fund versus a quarterly FMP.
In both,most investors will keep rolling it over.
The renewals in interval funds are automatic and, hence, there is no tax incidence. So, if an investor does this for more than four quarters, the gains from it automatically become longterm capital gains.
However, each FMP is closed at the end of the tenure & the money is invested in new FMPs. So, each quarterly gain is treated as a short-term capital gain.
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