While Fixed Maturity Plans (FMPs) have had a poor run since the beginning of this financial year, now with interest rates poised to move up demand for these plans has revived. Of the 12 FMPs launched since April, nine have been launched in September and after. And of the Rs 1,600 crore mobilised by FMPs this financial year, Rs 1,400 crore has been collected since September. After investors burnt their fingers during the 2008 debacle (see box: The crisis), these products had fallen into disfavour. Why then are they back on investors’ radar screens now?

The turnaround

Interest rates poised to move up. With inflationary pressures increasing due to escalating food prices, interest rates are expected to harden. Economists believe that the Reserve Bank of India will first tighten liquidity with a CRR (cash reserve ratio) hike and then follow up with repo and reverse repo rate hikes. These could come anytime between January and June 2010.

When interest rates move up, the net asset values (NAVs) of long-term debt funds get eroded. Investors then have two options — either to stay put and wait for the interest-rate cycle to turn, or to move to instruments like FMPs that enable them to capture the gains from rising rates.

Predictable returns. For a part of their portfolio investors want predictability in the returns they will get on maturity. Today that predictability comes in the short term from deposits, bank or corporate, and in the longer term from a few insurance products. FMPs are another category that offers predictable returns over the short term.

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