Indian Mutual Fund FMPs Turn Out a Big Draw for Overseas Investors

Attractive returns, as high as 9.75% in some cases, and safety from currency fluctuations are main draw

Fixed maturity plans (FMPs) may have lost some of their charm among domestic investors, but these are a big hit among foreign investors, mainly from Europe, the US and the Gulf.
Attractive returns against low fixed-income yields in developed markets are prompting overseas investors to load up their portfolios with Indian fixed-term investment plans, said people close to the development.

"A significant interest has been seen in funds similar to fixed maturity plans in India," said Gaurang Shah, president, asset management, life insurance and international business, Kotak Mahindra Group.

"As the investor is looking for an expected return from his investments, he is usually seeking an investment which is hedged against currency risk. Thus, significant inflows are seen in such products when the dollar-rupee forwards are not high," Shah added. FMPs are closeended schemes of a specific duration. This genre of funds invests in debt and money market instruments maturing on or before the date of the maturity of the scheme.

UTI, Birla Sunlife Mutual, Kotak Asset Management, Reliance Mutual Fund, ICICI Prudential Mutual Fund and Religare Mutual Fund, among others, have managed to raise significant sums of money in their offshore FMPs --many of which have indicative yields as high as 9.75% per annum. With growth coming off and return on investments hitting the downward spiral, investors across the globe are looking for investments that provide high yields and reasonable security.

FMPs -- which are typically 'lockin-at-high-yield' products -- lost their appeal among domestic investors once short-term rates started coming off in local debt market. This product is attractive only when short-term rates move up.

Foreign investors find Indian FMPs attractive because of the marginally high returns they deliver over similar range of international fixed income products.

Institutional investors, who can avail themselves of low interest bank loans, are taking leverage positions in short-term FMPs (mostly 90 days), where they get a comfortable 3.5-4.5% rate spread, higher return kicker on the currency and also have lower duration risk.

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