Has FMP saga taught anything?

Most investors thought of fixed maturity plans (FMPs) as something that was absolutely safe. After all, they were debt securities and the funds were locked in so there was no maturity mismatch. Most Indian FMP investors were in for a rude shock when a couple of mutual funds unilaterally decided to extend the date of their FMP maturity by more than one year. The reason was that these funds had invested heavily in Zee group bonds and most of that had soured.

The total exposure of the Indian mutual fund industry to the Zee group bonds is in excess of Rs.9000 crore. There are quite a few questions that arise. Were the trustees aware that MFs were actually giving loans against shares? If so, then why did the trustees not flag the issue immediately? What is the regulatory follow up action that is being taken because the problem appears to be rampant across mutual funds? As usual, the rating agencies have been caught napping, exactly like in the case of the IL&FS fiasco.

The good thing is that there are not too many retail investors in FMPs and they are more of corporates and HNIs, who are relatively well informed. The problem was that most of the mutual funds had actually given loans against shares to the Zee promoters which were structured as an NCD. After the sharp fall in Zee prices in January, Subhash Chandra had entered into a deal with mutual funds not to sell shares to avoid another price fall. The stock has stabilized because MFs are not selling. But Zee is unlikely to get a buyer at this price and for Chandra to sell his stake the price of Zee may have to fall. That would mean that the mutual funds will be allowing the collateral against their debt investments to deplete and that may not be acceptable for funds. Funds can get away with risk talk but investors are surely in a Catch-22.

The understanding of risk is still quite limited among mutual fund investors. Most investors tend to blindly believe that any kind of debt paper is an assured return product. That is not the case. Investors need to realize that like equity funds have their own set of risks, debt funds like FMPs also have their own set of risks. In the last few years, the sharp rise in MF inflows has forced fund managers to look at sub-par debt to enhance returns. MF investors would do better to get a clearer perspective of risk in the context of debt. FMPs have proved that there is no free lunch!


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