MF serial plans: Threat to FDs, bonds

Suresh Krishnamurthy

THE first significant step has been taken by the mutual fund industry to tackle the dominance of the fixed deposit instruments and bonds in the market for debt instruments.

Kotak Mahindra Mutual Fund, which first introduced serial plans under K-Gilt in 1999, invests in government securities. It has now introduced serial plans under the K-Bond plan, which invests in corporate securities and money market instruments.

Serial plans are open-ended with a fixed term-to-maturity. The plan invests in securities which mature before the scheme's date of maturity. Any investment in a serial plan held till maturity will share a trait common with that of fixed deposits and bonds -- the elimination of a decline in value of investment due to interest rate changes.

The introduction of serial plans is the first serious threat to FDs and bonds. Their earlier introduction under K Gilt is strictly not comparable to FDs and bonds, since they invest only in government securities. Since a serial plan under K-Bond will invest in instruments offered by corporates, which also offer FDs and bonds, they are likely to pose a threat to these instruments.

Here, it is logical to argue that by investing directly, investors are likely to get better returns vis-a-vis through mutual funds, however low the management costs are. It is important to note two aspects. One, the benefit of diversification offered by a mutual fund. Two, investors can get exposed to the more competitive private placement market, which is not the case with direct investing.

For now, serial plans are targeted only at wholesale investors with the minimum application amount being kept at Rs 5,00,000. They are unlikely to emerge as a serious competitor to retail funds in the short-term. However, as the liquidity in the debt market improves, serial plans are even more likely to be positioned as an investment opportunity for retail investors.

Another important point is that more than FDs, in the short term, bonds such as those issued by the financial institutions are more likely to feel the pinch. At present, the returns on FDs are quite attractive compared to what mutual funds can offer. This is not so with bonds. Overall, these developments signal the emergence of a new scenario for investors -- in which they would have more alternatives to choose from. A welcome one too.