• Is your money really safe in Fixed Maturity Plans?
    Kunal Moktan - 12 Apr 2019

Is your money really safe in Fixed Maturity Plans?

 

 

Mutual fund houses have been aggressively pushing these plans to layman investors promising safety of capital and predictable returns. What can go wrong with these supposedly AA or AAA rated entities?

 

As it turns out, many!

 

The past week, Essel Group of companies (Zee) defaulted on the repayment of principal on its debt that had been subscribed by many FMPs including Kotak MF, HDFC MF, Aditya Birla and ICICI Prudential. The FMPs were in turn palmed off to layman investors whose capital is now at risk. They will either not be repaid or repaid with a delay, which will significantly impact IRRs on the investment.

 

As per reports, close to Rs. 1,400 crores of such instruments are in default risk.

 

As an investor how does one avoid such a risk?

 

Invest only in debt issued by the Government of India or at worst AAA rated blue chip companies, which form part of the index like Nifty50 or Sensex 30. The difference in yield between these securities and FMPs are in the tune of 150-200 bps, which is not commensurate with the risks involved. Avoid getting swayed by “sales speak” of the fund houses who will use all manner of past performance to get you to invest in them.

 

Invest in Fixed Deposits. While they are often seen as “boring”, fixed deposits are relatively secure investments especially when done with Tier I banks. Avoid cooperatives and Tier II banks.

 

Invest in hard assets like commercial real estate where the predictability of cash flows through rent is matched by the capital protection afforded by the real estate underneath. A commercial property will not go bankrupt like a company. There will always be a buyer for it. Yes, the value may fluctuate and sale may take time, but capital is not entirely at risk.

 

At PropShare, we buy completed commercial properties tenanted to blue-chip companies at 8-9% yields. We look for parameters like – Who has done the fitouts? What is the market vacancy in the micro-market? How long is the lock-in period? How good is the development? etc to judge the stickiness of the tenant (and therefore predictability of cash flows) and quality of the asset (and therefore liquidity on sale).


About the Author

Kunal has over 7 years of real estate investing experience with Blackstone Real Estate Partners, the world's largest real estate fund with more than $102 bn of AUM. Kunal was part of a 3 member team that started Blackstone's India investment office investing $1 bn over 5 years becoming the largest office landlord in the country.