How to factor in the risk of lower redemptions and rollovers in fixed maturity plans.

In discussion with Niraj Shah of Bloomberg Quint, Tarun Birani shares in-depth insights on the pressing issues concerning the markets and the recent news on FMPs which affects Rs.744 crores in exposure, run by 4 fund houses. The concentration of single promoter holdings and illiquidity of FMPs make them an unfavorable choice, especially in the current market scenarios. Tarun dwells deep on what investors can do to reduce the negative impact on their investments due to the recent market developments. Tarun Birani strongly states the bottom line for investors, which is: understanding your risk appetite and your goals for which you are investing. Awareness of these two fundamental factors will ensure you invest prudently in instruments that suit your investing style and purpose.

About Tarun Birani: Enriched with a vast and diverse experience in the field of Financial Advisory, Tarun’s bespoke advice in personal finance has transformed the lives of many busy professionals, entrepreneurs, business heads and families. Tarun also regularly contributes his analysis and views on topics like Behaviour Finance and Personalized Financial Planning to a variety of established media houses namely, Times of India, Economic Times, Mint, Moneycontrol and more. He has also been an esteemed panel member for multiple Wealth Management Forums on ET Now and Hubbis Wealth Forum.

About TBNG Capital Advisors: TBNG Capital Advisors is a 15 year old SEBI Registered Investment Advisory Firm with an independent and transparent approach who aims to provide the best services possible to our clients free of any biases towards any product or fund house. To know more about us and our services visit

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In discussion with Niraj Shah of Bloomberg Quint, Tarun Birani shares in-depth insights on the pressing issues concerning the markets and the recent news on FMPs which affect Rs.744 crores of exposure (run by 4 fund houses). They dwell deep on what investors can do to reduce the negative impact on their investments due to the recent market developments.

Niraj Shah: We have tried to get enough opinion from all the AMC houses, Nilesh has probably been one of the few who has actually come and spoken about it as well. I want to get your opinion on what you think has happened and what is it that you have told your clients to do with their existing investments if they were a part of this and what to do with this whole bouquet of fun which is a fixed maturity plan? How do you see this?

Tarun Birani: So my take on FMP right now is a couple of very serious stuff, which needs to be looked at carefully, one is the concentration part. The concentration of single promoter holdings in the FMPs has been very high. This is a cause of concern number 1. Number 2 Due to lock-in kind of nature, the investors don’t have the flexibility available. So I would rather look at a structure like an open ended FMP structure which is currently available, like a banking and PSU fund which have a roll down maturity kind of a structure. I would rather be looking at something like that, because I think one risk is the concentration risk, which normal investors find extremely difficult for them to understand and second is the loan against the security guarantee structure. First of all as a debt instrument, loan against security is something which is kind of giving a quasi-equity kind of structure. So which, according to me in a debt structure, investors do not come to suffer all these kinds of things. So rather I would be looking at when I have to take a risk, I would rather take an equity kind of risk only. On the debt side I would try to keep it very safe and simple, not get into something like that so FMP for me is a no-no current scenario.

Niraj Shah: Only in the current scenario?

Tarun Birani: Current scenario means in the last couple of years, we have started disliking the FMP as a structure, because this illiquidity is just not working for the client and the kind of papers, credit quality, all these are concerns. So you would rather get into an open ended structure where you have flexibility to move in, move out and we really don’t want to play credit.

Niraj Shah: We did a small event on S Narain on Saturday, who was one of the guests. He mentioned that he loves investing in sectors which become irritants, because then the evaluation is lower, the market is boring the product and therefore the price at which it is available is damn good. He mentioned that credit risk funds are something related, so that is a good one. Corporate debt funds may also be an interesting one to look at. This is what a couple of advisors have said because the yield to maturity on all these products is high. Now the point is that the confidence on these products may be a bit low right now. What my viewers would want to know right now is that, if Tarun Birani had 5,00,000 rupees to invest, would he and wants to invest in non-equity funds, would he go out and make an investment into a corporate debt fund simply because the YTM and the resultant potential return Is higher right now or would they be better options in the non-equity category?

Tarun Birani: So it would again start with a suitability exercise for the client, where in what kind of time horizon the client has, what kind of a risk appetite the client has and all those things need to be understood in detail and what kind of investing experience the client has. But as a philosophy if you ask me, I have a very binary philosophy that if you are looking at equity risk, I am looking at risk and If you are looking at debt, I think okay I don’t want exciting 13-14% yield kind of structure because whenever the investor invests in debt, I think the behaviour is like the risk of capital is completely 0 and when you get a shock like this which has happened in FMP right now, I think the investor’s confidence can go for a toss. So I would rather look at that debt from a purely safety point of view. But what you just mentioned I think is a very contra oriented strategy and I think investors who have invested in kind of contra situation like this where in the credit yields are upwards of 13-14%, 12% kind of, couple of things one is investors can be careful about what kind of concentration the portfolio has, how much concentration a single promoter holding has. If the funds scheme has let’s say not more than 2-3 % in a single promoter, I think it would be a great idea because the risks are fairly divided compared to somebody who is holding 10-15% in a single promoter. So that kind of credit risk fund should be avoided and maybe funds with say 2-3% promote holding could be looked at. That is one way to look at it. The most important point to be kept in mind right now is the debt structure. Safety is important, so rather look at something which has a good credit quality. I think that it is something that should be looked at.

Niraj Shah: Your philosophy of being what it is, what are the non-equity funds that you are recommending and are there any FMP plans that you are recommending? I’m guessing not.

Tarun Birani: No FMP is something which we will avoid right now. But in terms of debt funds, I would look at the banking and PSU category. So the YTM also looks attractive there and the big benefit where I see right now is locking at the higher rate. So rolled down maturity gives you an assurance that after 4 years also like an FMP.. so what is the genesis of an FMP. Why did people like FMP? Because like fixed deposits, they want to lock at a current rate. So these open-ended FMPs or the rolled down funds make sure that come what may next four years, even if in the open-ended structure new money will come in, they will make sure the maturity of the portfolio is maintained similarly. Let’s say you are entering today so your yield gets locked in. So, due to that it’s working like an open ended FMP structure and in emergencies you have a without exit load structures available. So I think the banking PSU access and IDFC has both these structures available. It gives you an indexation of 4 years also. To me, that looks the best at this point of time. Apart from that, one can look at corporate bond funds also. At this point of time you would like to pay at the shorter end of the maturity which looks much more attractive so we would like to avoid longer maturity dated funds.

One more space which investors would be happy to enter right now would be asset allocation kind of categories, which has very low equity structure. So I think that is one space I feel can really give clients the return kicker also. At the same time the risk minimization can also happen at that space. So, something like a dynamic asset allocation kind of a strategy wherein you have an option to increase or reduce the equity. The fund manager has the flexibility. Or there is a structure which is working there. So the historical data that we have seen, tells that the standard deviation of the risk portion of this portfolio is extremely like 4-7% kind of range. So something like getting into a credit risk fund and compared to that let’s say getting into a dynamic asset allocation strategy something like that, could also be looked at for investors looking at making higher returns than debt. So that as a category could also be explored.

Niraj Shah: Those emails in our inbox which speak about your expense ratio for now, from this house is different from what it was. Now can you explain what has happened, what is the impact on the expense ratio and thereby what is the impact on my returns if I have these Schemes.

Tarun Birani: Sure, around October SEBI came with a circular wherein they mentioned that any scheme, so I am just talking about more equity and hybrid schemes right now, because their expense ratios are much higher. So any scheme which has more than 5000 crores, so the existing expense ratio structure will be reduced by 10 basis points with every 5,000 increase in the AUM, so according to me it is an extremely positive move because these expense structures have been decided for 7 years or 8 years before. The AUM of these AMCs used to be say 3000-4000 crores. Today we have 15 to 20 such schemes which are more than twenty thousand crores in AUM and as we all know with increase in the AUM the efficiency economies of scales are much higher. So due to that, it would be beneficial for the investors to get that benefit because anyway, for a fund manager, the fund management cost and all those get reduced as the AUMs increase. So in this move SEBI has actually reduced that and we have all these erstwhile 15-10 year old schemes which have AUM higher than 10-15000 crores. They will all be benefited. So for a lay man investor the benefit would be let say, either if you take a regular plan or direct plan they will have in these schemes at least a 10 basis point 15 basis point reduction in the expense ratio, which in future is going to definitely add in their long-term returns on the portfolio. But I think investors need to be extremely careful not to look at just the expense ratio as a marker to decide a fund, because this is just one bit of it. I think it is again to do more with the suitability of the client, what is more important for them first of all and second is the fund management pedigree as to what is the parentage of that fund house, what is the process they follow. So, all those performances need to be looked into detail before deciding on investing in a scheme. So expense ratio should not be a sole factor to look at.

Niraj Shah: Anything else that would form a top advice from you to investors as we almost kick start the financial year, which has already been two weeks till now.

Tarun Birani: Couple of days before I was listening to a very motivational speaker and he mentioned two things, what is the difference between a motivation and an inspiration. Motivation is something which is short lived and an inspiration is something which stays with you. I feel for investors also I think the short term kick is something which needs to be avoided and inspirational, they need to build up a habit for long term wealth creation. So how can they do that. For doing that I think they need to get their purpose very clear. What is the purpose that they are looking for in investing. Once the purpose path is clear, the suitability and all those things happens, I think identifying investment becomes very easy and I think a scenario like a FMP issue which has happened or any kind of debt challenge what we have seen 6 months back, I think investor’s decisions which have been much more rational if their purpose have been very clear and if they have invested just by listening to someone or because of herd mentality everybody is investing, I have seen their reaction, the way they would have reacted would have been much different. So I feel they need to be much more evolved, which needs to come in while identifying Investments.

Tarun Birani strongly states the bottom line for investors, which is: understanding your risk appetite and your goals for which you are investing. Awareness of these two fundamental factors will ensure you invest prudently in instruments that suit your investing style and purpose.