Drop in FMP & Liquid fund yields
While there’s no question about the tax benefits of Fixed Maturity Plans (FMPs) over bank fixed deposits (FDs), here’s something to keep in mind: Indicative yields on short-term FMPs take a dip
FMPs, in general, and short-term FMPs, in particular, were using bank FDs to offer higher post-tax returns than direct investment in the FDs themselves. The money collected by FMPs was being parked in FDs which have been offering an annualised return of 10% in the recent past. This helped FMPs offer a higher indicative yield . . .
But Sebi’s rule change has pushed indicative yields down since funds now have to invest in other, lower yielding assets.
Quarterly indicative yields are now in the range of 8.5-9.35% (annualised), down from the 9.4-10% earlier.
A tutorial on FMPs is available here.
And on a somewhat related note: MFs say no to fresh investments in liquid funds
The high inflow of funds has pulled down the returns provided by the `liquid funds’ as most mutual funds are already sitting on surplus cash in the absence of avenues of investment . . . This has taken the returns from liquid funds down to around 5.5% compared to over 8% previously.
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