[ad_1]
As yields rise, a large number of asset management companies have launched fixed maturity plans (FMPs) to take advantage of better returns for investors even as bank deposit returns lag the actual short term yields. Almost INR 7000 crs have been collected this year, more than twice of the amount collected last year as per media reports. And now, to add to this, new opportunities exist for the Global Indian via Prabhudas Lilladher!
WHAT ARE FMPs
FMPs are closed-ended mutual fund schemes offered by mutual fund houses for a short span of time and have fixed maturities varied from a few months to a few years. FMPs park their money in corporate bonds, CDs, CPs, government securities and other money market instruments. Since the maturity of the debt is in line with the FMP maturity, the investor benefits by locking in current yields without risk though of course, an underlying credit risk remains.
FMPs held for more than 36 months become a long-term investment and offer tax benefits with the option of indexation. With this advantage, investment in FMPs beat bank FDs. Especially HNIs investors find fixed maturity plans quite attractive for reducing their tax liabilities.
It makes sense in the current context to select such products as yield curves have flattened – For example, the current 2-year Indian Government bond yield is 7.23% whereas the 10-year bond yield is 7.5% https://in.investing.com/rates-bonds/india-10-year-bond-yield .
Since the market expects the bond yields to go higher, it is better for investors to put money in shorter-term instruments and reinvest at expected higher rates on maturity.
The Global Indian however has other considerations – for someone who wants to save money at a predefined rate of lets say around 8%-10% for the next 3 years and either has a dollar expense ahead OR believes the USD will remain strong in the foreseeable future, FMPs have the right structure but the wrong yield as its in INR terms.
SONE PE SUHAGA!
What If you could invest in S&P/Fitch/Moodys rated Investment Grade Paper (Ratings above BBB) to benefit from the higher returns in International Bond markets , get the returns regularly in USD terms AND earn better returns than Indian FMPs? While even Indian USD bonds above BBB rated are available abroad – and (issued) worth about 100 Bn USD, the international market in such bonds is above USD 7 Trillion! Read more about https://www.blackrock.com/corporate/literature/whitepaper/policy-spotlight-us-bbb-rated-bonds-a-primer.pdf)
There are opportunities afforded in this space because of our alliances in international markets with reputed fund houses , who pass through our due diligence filters, as well as the LRS (Liberalised Remittance Scheme of the RBI) mechanism available.
Read more about LRS at https://www.plindia.com/blog/des-pardes-the-how-and-why-of-investing-in-us-markets/.
Once the USD limit for Indian mutual funds of 7 Bn USD was crossed this year, Indian HNIs seem to have taken up direct investing internationally as outflows for investment in international stocks and bonds under LRS rose to an all-time high of $747 million in FY22, up 58% from $472 million in FY21, according to RBI data.
Our product teams are currently identifying safe USD denominated instruments managed by internationally renowned houses, where investing is allowed under the LRS route and approved by international regulators and which can deliver above Indian FMPs returns (USD terms) . Since the underlying funds have quality bonds (typically about 60 to 80 instruments with individual securities exposures capped at less than 3%) and similar maturity of instruments as the tenure of the fund (short duration, typically 2 years), it acts similarly but generates better returns. Also unlike Indian debt markets, which have a concentrated list of issuers, global markets afford a massive opportunity for instrument selection thus offering relative safety as well.
One interesting thing to know – internationally, less than 0.34% of bonds rated above BBB get into default status so the likelihood of any credit risk is also minimized! Read more about ratings at https://www.investopedia.com/terms/i/investmentgrade.asp
Typically such international funds offer higher returns due to multiple factors – a) lower expense ratios relative to India, b) much more ability to select instruments globally as well as c) leveraging the quality portion of the portfolio by investing upto 1.5x of the NAV in quality instruments via credit facilities from international banks. So a 1.5x levered mutual fund portfolio may offer say 9% even though the underlying yield is 6%.
The only constraint is that such instruments, due to the scale of operations abroad and costs of service, are available to investors who can invest above 100,000 USD typically so still out of reach of many of us .
Final Word
You may of course, if you are an equity expert, use the LRS route to invest in international equities via our International Equity and ETF platform, (https://pl.vested.co.in) but then we are sure you have diversified as well (if not, please do consult our wealth management desks at wms@plindia.com for suggestions) – and for this diversification, remember that the debt component of your portfolio also now has capabilities beyond Indian shores!
To know more about how you could get the Federal Reserve actions work to your advantage via these FMPs, reach out to our Wealth desk at wms@plindia.com today!
View more about our videos for products and services at https://www.youtube.com/c/PrabhudasLilladherIndia/playlists
Happy Diwali and Wish you a very happy and prosperous year ahead!
The PL Blog Editorial Team
[ad_2]
Image and article originally from www.plindia.com. Read the original article here.