HOW TO BUY AN FMP?

Unlike regular open-ended or closed-end mutual fund (MF) schemes that are open in their 'New Fund Offer' (NFO) period for around 20 to 21 days - or sometimes even for a month - fixed maturity plans (FMP) are open for a few days only. Companies require money for their daily needs on a regular basis, hence they tap various sources like banks and MFs, regularly. Hence, to keep the money supply going, and at the same time to tap the prevailing high interest rates as soon as possible, FMPs are launched in quick succession. 

It is also rare that your agent will push FMPs to you because FMPs are low-margin products. Unlike equity funds where agents earn as much as 2.25 per cent front-end commission (and trailing fees of up to 0.50 per cent for as long as you stay invested), FMPs have a very low cost structure. MFs earn only upto 0.50 to 0.75 per cent or so from your FMP, out of which they have to pay agents commission. Online brokerages also sell FMPs selectively. Kotak bank (online broker) and www.icicidirect.com do not, to the best of my knowledge. www.sharekhan.com does; it has a special FMP section on its internet trading website.  

So how do you buy an FMP then?

It's best to keep checking with your broker. He gets information of all the on-going FMPs. You have to take the initiative, because FMPs come and go very quickly. He may not want to go out of his way to sell you FMPs, but if you take the initiative and ask him, there are more chances of you coming to know. 

Scout MF websites. All MFs have details and application forms of on-going FMPs on their websites. Download the forms, fill them up (make sure you write 'DIRECT' in the agent's code box on the top part of your application form) and visit your nearest MF's office or its registrar & transfer agents' and submit the form. To get a list of 'point of acceptance', check out your MF's websites. 

If you are investing more than Rs 50,000, make sure your KYC is done. Also, ensure that you carry a copy of your PAN card. If you can carry your original PAN card, better. 

Where do we invest now?

Stocks are floundering with the global economic situation still very murky and massive financial messes still to be cleaned up in most US financial institutions' balance sheets (or not, since most are 'off the books' ;-)

Fixed income is far less than inflation, but it still looks like the best medium term place to park money :(

FMPs ARE GOOD....

...but watch out for the credit risk

With interest rates on the higher side, thanks to a host of factors like inflation, high oil prices, etc., fixed maturity plans (FMP) are offering attractive yields. FMPs are debt mutual fund (MF) schemes that come in duration of 1-month, 3-month, 6-month or a little over than a year to around a year and 18 months. These are closed-end schemes that invest in fixed-return instruments and then stay invested in them till maturity. They usually buy into instruments that mature a few days before the FMP itself matures. Since they stay invested in their underlying instruments and do not trade (unlike active bond funds), they eliminate the interest rate risk.

Although the market regulator, the securities and exchange board of India (Sebi), has banned MFs from assuring any return, most FMPs will tell you in advance (strictly off-the-record and through MF distributors) the indicative yield. This is the yield you are most likely to earn, but you need to stay invested till maturity. 

But in a run to be ahead of competition and thereby offer a higher yield, some FMPs invest in lower-rated instruments. A lower-rated instrument will offer a higher yield to the lender (FMP; since FMPs invest their money in these instruments) to compensate the FMP for taking on added risk. In the course of my work (I am a journalist by profession, with Outlook Money - a personal finance fortnightly) , I came to know about a prominent MF whose one FMP got into trouble recently. One of the debt papers in which it had invested, defaulted. The MF's parent company - itself a major financial powerhouse in India - had to step in, I am told, and make good the shortfall. The bad debt was then transferred to another FMP and thus rolled over. 

Typically, higher the indicative yield, better is an FMP. But don't just go for high-yielding FMPs. Look also at the MF's pedigree. An FMP, if selected well, offers better and tax-efficient returns than a bank fixed deposit. And the only way to keep apprised of the latest FMPs that are open in the market, is to get in touch with your distributor.  

Where is the bottom?

Is the bottom around 12700? Or if the government falls next week and Oil goes to $200 I think we might see 9000... or who knows these days :)

But realistically, its a good time to look at your portfolio and keep cash ready for buying over the next few months.

It might be a good idea to buy some good MFs that are invested in a portfolio heavy with stocks you like. Its tough to decide which specific stocks to buy, so I am going the MF way, after making a few investments in some old favourites like Sesa, Aban, RIL etc.

Texmaco & Reliance

Seems to be a good bet in the rail space. They manufacture wagons for Indian Railways and have a good order book. Recent results (Q4 Mar 2008) were superb and sales have doubled over the financial year 2007. At Rs 1550 the stock offers a good opportunity to counter rising oil prices and could be accumulated at every decline (about Rs 1400 would be a good rate to BUY).

Another stock to watch and buy on major corrections in the market is Reliance Industries. Its gas projects will come onstream in a few months and contribute to the top and bottom lines.

Real opportunities

The next destination for investment in the real estate space around Bangalore is definitely Bidadi.

1. BMRDA township project awarded to DLF and its expected that in 3-4 years we will see something come up.
2. Industries already exist in the vicinity
3. Bangalore Metro

Plots are in the range of Rs 700/sqft at present. For a holding period of around 5 years, returns could be quite good.

Watch out for the next correction

The next correction is round the corner. Prepare your buying lists and get ready to pick up some great stocks at bargain prices. This could likely be the market bottom, so it may be offer open while stocks last ;-)