All About FMps

Understanding Fixed Maturity Plans (FMPs)

(1) What are Fixed Maturity plans?
(2) FMPs do not guarantee returns but their returns are fairly predictable
(3) What are FMP maturity periods?
(4) Can I withdraw before maturity?
(5) What to look out for?
(6) What to look out for?
(7)Risk Factors
(1) What are Fixed Maturity plans?A Fixed Maturity Plan (FMP) is a fixed income scheme and generally is 100% equity free. FMPs have a fixed life and a definite maturity date i.e. they are closed ended schemes and hence the name Fixed Maturity. Post the maturity date the fund ceases to exist and your investment along with the appreciation is automatically returned back to you.

(2) FMPs do not guarantee returns but their returns are fairly predictableThough Fixed Maturity plans do not guarantee returns they are relatively more predictable in their returns. Here’s how.As investments generally do not flow in or out during the tenure of the scheme it allows the Fund manager of the FMP to lock into a pre-decided fixed instrument (could be debentures, Commercial Paper, Certificate of Deposit, Gilts i.e. securities issued by the Government of India.) and hold on to it till the expiry of the instrument. Quite naturally the maturity profile of this fixed income instrument would be similar to the maturity profile of the scheme thus lending FMPs their relative predictability. Thus unlike an open ended fixed income fund, the fund manager here generally does not trade.

(3) What are FMP maturity periods?FMPs come in various maturities. Typical maturity periods are 90 day, 180 days, yearly (though the maturity tends to be slightly more than a year to avail of double indexation benefits), 3 years etc. A 90 day FMP simply means a FMP with a maturity of 90 days.

(4) Can I withdraw before maturity?FMPs that have a maturity of more than 90 days, have to provide investors specific exit dates where investors can withdraw. But this comes at a price. These exit dates are pre-decided and known beforehand.You can withdraw only after paying an exit load i.e. a penalty for early withdrawal as the fund manager may have to break the scheme’s investment in an otherwise locked-in instrument thus entailing transaction costs and in an extreme scenario even a decline in returns of the portfolio as new instruments may or may not yield the earlier yields.

(5) What to look out for?Though FMPs have a definite maturity, the credit quality of the portfolio is crucial. Credit quality simply means if the issuer of the fixed instrument that the fund manager chooses to invest in is reputable or not. AAA is the rating that is issued to a reputed borrower. Logically a better quality portfolio should yield you less than a portfolio which compromises on portfolio for returns.

(6) FMPs are less taxingDividends declared in FMPs are completely tax-free in your hands though the fund deducts a Dividend distribution tax of 14.1625% at source.

MF NAVs bounce back sharply on surge in mkts

Equity diversified NAVs bounced back sharply but the volumes dipped on Friday. MF NAVs ended with positive advance:decline ratio of 168:7, as it was a relief rally in the Indian markets, after fall in last seven consecutive sessions. Short covering in heavyweights and positive global markets lifted the benchmark indices higher. Huge buying was seen in power, oil & gas, capital goods, banking, telecom and technology stocks.
The Sensex shot up 464.20 points or 5.49%, to settle at 8,915.21. The 50-share NSE Nifty shut shop at 2693.45, down 5.50% or 140.30 points over previous close.
All sectoral funds advanced. BSE IT, Bankex, Auto, Healthcare and FMCG indices were up by 4.85%, 4.56%, 2.31%, 1.75% and 1.68%, respectively.
Equity diversified NAVs bounce back sharply
All sectoral funds advance
Check out the mutual fund gainers & losers
Among the equity diversified funds, the top gainers were JM Multi Strategy Fund (G) up 6.81%, Reliance Equity Advantage Fund - Retail Plan (G) up 4.96% and Reliance Quant Plus Fund - Retail Plan (G) up 4.73%. The top losers were Birla Sun Life International Equity Fund - Plan A (G) down 2.72%, Escorts Leading Sectors Fund (G) down 2.05% and Escorts Infrastructure Fund (G) down 1.29%.
Among the tax saving funds, the top gainers were LIC MF Tax Plan (G) up 4.66%, Birla Sun Life Tax Relief 96 (G) up 3.45% and DBS Chola Tax Saver Fund (G) up 3.44%. The only loser was Escorts Tax Plan (G) down 0.21%.
Among the sector funds, the top gainers were UTI Services Industries Fund (G) up 4.53%, JM Telecom Sector Fund (G) up 4.12% and UTI Banking Sector Fund (G) up 3.70%. The only loser was Sahara Banking and Financial Services Fund (G) down 0.09%.
Among the balanced funds, the top gainers were LIC MF Unit Linked Insurance Scheme up 3.69%, Sundaram BNP Paribas Balanced Fund (G) up 3.07% and ING Balanced Portfolio (G) up 2.82%. The top losers were Escorts Opportunities Fund (G) down 1.05% and Escorts Balanced Fund (G) down 0.92%

MFs' concerns eased in November

The crisis in the mutual fund industry seems to have eased. CNBC-TV18 has learnt that the Sebi Chairman assessed their liquidity situation last evening.

According to sources at the Securities and Exchange Board of India, or Sebi, liquidity concerns of MFs have eased. The net inflows have been across equity and debt in November so far. Sebi Chairman CB Bhave has assessed the situation with leading Mutual Funds on Monday evening.

Some MFs have transferred real estate assets to Asset Management Companies (AMCs) reducing risk to schemes. MFs are confident of selling assets in case of redemptions.

The UTI Chairman, UK Sinha has said that the crisis is over and there is no panic anymore. There are stronger inflows in November.

AP Kurian, Chairman AMFI has said that the MFs have repaid Rs 16,000 crore of Rs 22,000 crore borrowed from special window. The inflows are strong in liquid and liquid-plus schemes in November.

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MutualFund Highlights

Key Findings: · On account of aggravated liquidity crunch world over and continuous redemption pressure on global hedge funds, FIIs have turned net sellers for the 6th month in a row for Rs. 153.47 bn. October month witnessed highest FIIs outflow in this year and on a cumulative basis since January 2008 FIIs outflow from Indian equity market stood at Rs. 515 bn. (~$12 bn.).· Relentless selling from FIIs and lack of parallel buying from DIIs and retail investors led to an abrupt fall in Sensex and Nifty, which have touched 52 week lows of 7697.39 and 2252.75 respectively. · In the current month till 12th November 2008, FIIs were net buyers to the tune of Rs. 1707 cr. perhaps on account of SEBI and FM's proposed measures to compel FIIs to reverse their overseas lending and borrowing positions and furnish the details on same on a weekly basis.· During October 2008, DIIs were net buyers for a mere Rs. 14.31 bn. as against FIIs selling pressure of Rs. 153.47 bn. On a M-o-M basis magnitude of selling is rising on FIIs part and to counter effect the same DIIs buying magnitude is plummeting owing to reducing cash balances. In current month so far DIIs were net sellers for Rs. 567 cr. · DIIs reported a massive erosion of 18.33% in their AUM size on a M-o-M basis to Rs. 4.31 trln. as compared to Rs. 5.28 trln. · For the month ended October 2008, certain fund houses have not declared their cash and equity exposure in full, the same which has been tabulated by us in this report. · As on 31st October 2008, MFs had Rs. 200.58 bn. In cash which constitutes only about 19.11% of the total equity corpus of Rs. 1.05 trln. In order to inject liquidity and restore confidence in the financial market, global central bankers have taken various coordinated monetary and fiscal measures by announcing series of bail out and stimulus packages and reduction in interest rates. On domestic front RBI and SEBI have taken following soothing measure:-· Cut in CRR and Repo Rate to 5.5% and 7.5% respectively, and reduction in SLR to 24%;· Relaxation by RBI in ECB norms for infrastructure sector;· Easing of creeping acquisition norms by SEBI to enable promoters to increase their stake up to 75% against 55% earlier, without SEBI's prior approval.· Increase in interest rate ceiling by RBI for NRI's rupee deposits to attract more NRI deposits and liquidity.

CLSA India

ICICI Bk & SBI fail to Roll-over Offshore Inter-Bank Loans It is increasingly clear to GREED & fear that the prevalent practice by Western governments of guaranteeing bank deposits and bank bonds is having very unfortunate consequences for those emerging market banking systems where governments are less willing to engage in such panicky policy making. Thus, GREED & fear heard in India last week that ICICI and SBI were recently not able to roll over their offshore interbank loans because their bonds have not yet been formally guaranteed by the Indian government. Similarly, it has to be wondered whether the apparent freeze in trade finance, in terms of the unwillingness to extend funding against letters of credit, is being caused or at least aggravated by a similar insidious regular arbitrage. This is, of course, why these blanket guarantees are so dangerous even as the supposedly responsible establishment media continue to defend such action on the pathetic argument that governments have no other option. What should be happening, of course, is that bad banks should be allowed to fail meaning that deposit flows would surge to the good banks, thereby awarding them for good behaviour. If this is clearly not happening, as the grotesque “Northern Rock” example shows, it does not mean that the “guarantee” policy is without risk. For the more the guarantees extend, the more depositors might wonder if the guarantees mean anything. This can be seen by assessing total bank liabilities in a country compared with the same country’s GDP. Iceland is the well known disaster story, whose bank liabilities are nearly nine times its GDP. This compares with six times in Switzerland and 1.1x in America. But there are plenty of other examples where it would not be so easy to honour the guarantee. Such a spectacle of a run on the global banking system may sound far fetched. But it is the direction in which the world is heading if governments persist in this stampede to guarantee. Such blanket guarantees do not represent tough political decision making. Rather they represent the easy way out, consistent with the complete lack of discipline associated with the current US dollar paper standard. To state the obvious, this paper standard continues to live on borrowed time. The now serious, and so far more worth watching, CNBC showed an interesting chart on Wednesday. This was the percentage decline in US financial stocks since it was announced that these stocks were getting taxpayer funding under the Troubled Asset Relief Program (see Figure 8). GREED & fear cannot imagine a more condemning indictment of TARP which clearly remains, to put it kindly, a programme in a high degree of flux For now GREED & fear’s hoped for relief counter-trend rally is clearly not happening. One explanation must be the complete lack of clarity about what TARP is meant to be. The desire for a new administration with a “fresh” approach is almost palpable. Mortgage relief is likely to be a priority. GREED & fear heard one proposal this week where qualifying applicant would receive a US$ 30,000 downpay check freebie and a 30-year mortgage from the Federal Housing Finance Agency (FHFA) fixed at 3.99%. With an average home price estimated at around US$ 180,000 that could clear 2.5m homes or one quarter of the 10m inventory of foreclosed homes.Whatever the exact details of the final policies implemented, this is likely to be the direction in which policy is heading. Finally, despite growing evidence of a thaw in the credit markets, GREED & fear has to admit that short-term Treasury bill yields remain ultra low reflecting continuing extreme risk aversion. Thus, the US three-month Treasury bill now yields only 0.15% (see Figure 9). In this sense America is already Japan.

BenchMark MF Unevils S&P CNX 500 Fund

Benchmark Mutual Fund house has launched Benchmark S&P CNX 500 Fund. It is an open ended index scheme. The new offer period (NFO) will be open for subscription from 17 November to 15 December. The face value of new issue is Rs 10 per unit.
The investment objective of the scheme is to generate capital appreciation through equity investments by investing in securities which are constituents of S&P CNX 500 Index in the same proportion as in the index.
The scheme offers two options viz. growth and dividend option. Dividend option further offers dividend payout and dividend reinvestment facility.
The minimum application amount will be Rs 10,000 and in multiples of Re. 1 thereafter. And the minimum amount for the subsequent purchase will be Rs 1000 and in multiples of Re. 1 thereafter. The scheme seeks to collect a minimum target amount of Rs 1 crore during the NFO period.
The scheme will invest 90%-100% in securities constituting S&P CNX 500, derivative on the securities constituting S&P CNX 500 with medium to high risk profile. It invests upto 10% in money market instruments, G-Secs, Bonds Debentures and cash at call with low to medium risk profile.
The scheme would invest in derivatives instrument when it is unable to buy any stocks which it is required to invest as per its investment objective or whenever it is beneficial to take exposure in derivatives instead of the equity security.
The schemes exposure in derivative instruments shall be restricted to 10% of the net assets of the scheme.
The scheme will not levy any entry load.
Exit load: For investment less than Rs 2 crore, the scheme charges 1.50% of an exit loads if redeemed within 1 year from the date of allotment. 1.00% if redeemed after 1 year but within 2 years from the date of allotment. 0.50% if redeemed after 2 years but within 3 years from the date of allotment. And it will not charge any exit if redeemed after 3 years from the date of allotment.
For investments of Rs 2 crore and more, the scheme will charge 0.50% of an exit load if redeemed upto 3 months from date of allotment and nil for the redemption made after 3 months from the date of allotment.
The benchmark index for the scheme would be S&P CNX 500 Index
Vishal Jain will be the fund manager for the scheme.

KYC Norms

By Research Desk Nov 17, 2008
I have made investments in different mutual funds, not investing more than Rs. 50,000/- in any one of them. My doubt is whether I can invest more than Rs. 50,000/- in a particular fund if the amount of each investment is less than Rs. 50,000/- as per the KYC (know your customer) requirements. Many investment consultants have told me that if each investment in the same fund is less than Rs 50,000/- at a time KYC compliance is NOT required. Is it so? Suppose I set up an SIP of Rs. 5,000/- for, say, 24 months, the total investment in that particular fund will be more than 50,000/-. Can I do that without KYC compliance? -Asim Kumar
Yes, you can make the investment more than Rs 50,000 in a particular mutual fund scheme. According to market regulator SEBI guidelines, all investors who want to make an investment of Rs 50,000 or more in a mutual fund scheme will be required to complete the Know Your Customer (KYC) process. This would also apply to SIP investment, but only if each SIP installment amount is greater than or equal to Rs 50,000. It is the amount invested at a single time that is taken up for consideration rather than the total amount invested over a period.
In above quoted example, you can do that without KYC compliance since the SIP amount is less than Rs 50,000.

Edelweiss to Launch an Arbitrage Fund

By Research Desk Nov 18, 2008
To diversify its offering Edelweiss Mutual Fund has filed an offer with SEBI to launch Edelweiss Arbitrage Fund, an open-end equity scheme.
Arbitrage funds make profit through simultaneous purchase and sale of an asset in order to profit from a difference between the spot and future prices of exchange traded equities.
This fund will offer two different plans, Protector Plan and Booster Plan with different portfolios. Both the plans will invest in arbitrage opportunities. The difference between these two plans is that, the Protector Plan will have a fully protected portfolio but the Booster Plan will have equity exposure limited to 5 per cent of the total asset.
The Protector Plan will allocate minimum 65 per cent of its assets in equity and equity related instruments and up to 35 per cent in debt and money market instruments. The Booster Plan will spread its asset across equity and equity related instruments and derivatives up to 100 per cent, debt and money market instruments up to 35 per cent and debt derivatives up to 20 per cent.
Both the plans will have no entry load. The exit load under both the plans will be charged at 1 per cent for redemption within 180 days of the allotment of the units and 0.25 per cent for redemption request after 180 days but before and including 365 days of the allotment of the units. Under the trigger facility provided by the fund, an investor can generate any event or action in advance, which may be related to time or specific action, the activation request for partial redemption will attract an exit load of 0.25 per cent if the investor is holding units for less than 180 days.
The fund will be benchmarked against CRISIL Liquid Fund Index. It will be managed by Mr. Gaurav Khandelwal. He has an overall experience of five years in securities market and prior to joining Edelweiss Mutual Fund, he was working with Edelweiss Securities Limited managing Options and Arbitrage trading desk.
Arbitrage funds are ideal for risk averse investors. These funds are more tax efficient than debt funds as they are treated in line with equity funds and they are less volatile in nature but their returns are more or less in line with the debt funds. This is the reason; this fund category does not draw much attention of the investors. Currently there are fourteen funds in the Arbitrage category.
Edelweiss Mutual funds started its operation in September 2008 and currently manages three funds in its debt category but it does not have any equity fund. The fund house has three offer documents pending for approval in equity category; Edelweiss Absolute Return Equity Fund, Edelweiss Diversified Growth Equity Fund and Edelweiss Nifty Enhancer Fund.

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