Fixed maturity plans (FMPs) came under a cloud in the last few weeks after leading AMCs admitted to their inability to honor their FMP commitments. The reason was a huge exposure to the Essel Group, which is owned by Subhash Chandra of the Zee Group. The Essel group had made some disastrous investments in infrastructure and most of it was irrecoverable. Chandra had sought time from the fund managers to redeem these bonds.
How did this come about?
The first signs of a crisis in FMPs were there when the stock of Zee group companies tanked sharply in a span of just 2-3 days. That was the time Chandra admitted that the group had made some illiquid investments to the tune of Rs.10,000 crore that was almost irrecoverable. That was not the issue. The real problem was that private group companies had raised promoter funding from mutual funds by pledging the shares of the promoter. Chandra has promised to make good the bonds by selling his stake in the Zee group to a foreign investor. In short, if the stake is sold then the promoter will realize the funds and repay the mutual funds which will be used to redeem the FMPs. Therein lies the Catch-22. The sale of stake will not happen at the current price and the price will have to fall to find a buyer. But that would mean the FMPs with shares pledged against them will run a huge risk of value erosion.
Should you roll over the FMP?
What should you do as an investor in an FMP of any of these funds that is caught in this mess of the Essel Group? The only merit in rolling over is that you will not only get the indicative return on your FMP but also additional returns for the 1 year holding period. Of course, this comes with no guarantee of getting your money but looks to be the best bet if you are not keen to lose returns. However, you may discover at the end of 1 year that the Zee money is not recoverable and, most likely, by then the stock would hardly be worth anything. Should you take that risk?
Known devil or unknown angel?
Your choice is between a known devil and an unknown angel. In a best case scenario, you can wait for a year and perhaps get you money back with handsome returns. What happens if you choose to redeem. The non-Essel portion will be redeemed at the yield indicated but the Essel portion may be paid to you at a discount to NAV. If the share of Essel exposure is 20% and you take even a 50% cut, you lose 10% of your value. With the normal returns on the balance 80% portfolio, you may just about end up getting back your principal. You should just take it and forget about this FMP. For all you know, these toxic assets may stretch much beyond Zee group. As well redeem the money and invest it elsewhere! ©