Rate cuts have resulted in a shift to income funds, with FMPs losing out and going out of favour...

The cut in key interest rates has resulted in a shift in investor interest from fixed maturity plans to income funds. A fall in rates will be good for long-term gilt and income funds. Moreover, further anticipated rate cuts is only attracting more investments into this class of funds.

The phenomenon is not new. In 2010 and 2011, the net inflows into FMPs was positive, given the high interest rate regime. In fact, the inflows into FMPs then were Rs 43,644 crore and Rs 89,046 crore, respectively, and the prevailing interest rates were increasing from 5 per cent to 8.5 per cent (See: One's loss is another's gain). At the same time, income funds witnessed a mass exodus with outflows touching Rs 1,60,600 crore in 2010 and Rs 30,940 crore in 2011.

In 2012, the reverse was being witnessed with a drop in interest rate and further cuts on the anvil; with investors fast shifting their money out of FMPs into income funds. From the later part of 2012, there was a spike in investments in income funds in anticipation of the imminent rate cuts, resulting in a net inflow of Rs 1,10,448 crore, while at the same time FMPs witnessed net outflows of Rs 12,223 crore. The scenario has only strengthened since January 2013, when income funds witnessed Rs 17,000 crore inflow in one month alone, with exits from FMPs to the tune of Rs 15,000 crore. What has been one category's loss has been the other's gain.

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