Don't panic… Be patient

For months now, equity fund investors have been having a harrowing time. The global meltdown and the steep falls in the stock markets have eroded their wealth to a varying degree. While equity funds have been reeling under the aftermath of the global crisis, some of the debt funds, i.e. liquid and liquid plus too had to bear the brunt of liquidity crunch.

The liquidity issue in the Indian markets was triggered by the advance tax payments and RBI's intervention in the forex markets to stabilize the depreciating rupee. However, realizing the gravity of the situation, RBI announced two CRR cuts in quick succession and that resulted in much-needed infusion of liquidity. Besides, RBI allowed all scheduled commercial banks to lend to mutual funds against buyback of certificates of deposits (CDs) for a period of 15 days. This was done to help mutual funds overcome redemption pressures. As mutual funds were grappling with the redemption pressures in liquid funds, some investors in Fixed Maturity Plans (FMPs) panicked too and started wondering whether their money was safe.

Some of them even made a beeline to take their money out. As the redemption pressure began to mount, a couple of funds decided to pay redemption proceeds in a staggered manner for big ticket transactions. This was done to protect the interest of investors who chose to remain in the fund. This added to the confusion and investors became more nervous about their investments in FMPs. Though FMPs do provide exit window, it is assumed that most investors will hold their investments till maturity. It is important to know that in a FMP, the fund manager invests in those instruments that will mature around the time of maturity of the plan. This not only eliminates the volatility risk but also makes it possible to know the indicative return that you can expect at the time of maturity.

Therefore, in an extraordinary situation wherein the fund is faced with sudden heavy redemptions, the fund manager can find it difficult to sell the securities. It can be even more challenging where there is a severe liquidity crunch. Remember, events that occur during an extraordinary situation do not indicate what is possible and what is not.

Are FMPs safe?
While the problems faced by liquid funds were related to the liquidity crunch, the FMPs suffered because of [PAGE BREAK]

panic caused by the doubts on the quality of the papers in some of them and the perceptions issues. Every fund declares an indicative portfolio and that can go a long way in making an informed decision. Existing investors too can have a look at the portfolios of the FMPs they are invested in.

Therefore, it would be wrong to shun FMPs as an investment option or to prematurely redeem holdings by paying a steep exit load. As it happens with every investment option, one has to be careful while making a selection. There are FMPs that invest the proceeds only in certificate of deposits from banks. If one is careful while investing in a FMP, there is nothing to worry about. Take the case of a FMP that invests only in bank CDs. If you invest in such a plan, you would be lending indirectly to 10-15 banks.

There is no doubt that FMPs continue to be an attractive option for those investors. However, when the interest starts declining, gilt and debt funds will emerge as a better option. Therefore, while deciding the tenure of the FMP, one should keep this factor in mind.

Those who have been investing through SIP are likely to benefit the most when the markets rebound. For those who have been waiting for the right opportunity, investing in tax savings schemes can be a good starting point. The lock-in- period of three years ensures that one takes a long-term view.

Besides, investing at the fag end of the year to save taxes, often results in making haphazard choices. Therefore, begin the process now and invest in a phased manner over the next few months.