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FMPs (fixed maturity plans) offer the best option among debt funds, With RBI rising rates
August, 01st 2011

The RBI's sharp interest rate hike has raised some questions about the impact of its move on fixed income mutual funds. There has no doubt been an impact, but it's more in the nature of confirming and cementing an existing situation rather than resulting in any new change.

Certainly, whenever interest rates rise, there is an impact on the price of debt securities and, thus, there should be a fall in the NAVs (net asset values) of funds that are holding these securities. Currently, rates have been on their way up steadily since February 2010, and no one can realistically say with any certainty when and where this trend will halt or reverse. The finance minister himself has said that this may not be the last hike.

However, the impact of rate hikes is proportional to the residual maturity of the securities. For securities that are maturing within a few weeks or months, the impact is minimal. And, as it happens, the fixed income mutual fund market has moved decisively away from long-maturity securities a long time ago. While the magnitude of the RBI's rate hike may have been a bit of a surprise, its general direction was exactly as expected and was part of a longestablished trend.

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