Buyer Beware

The latin phrase caveat emptor or buyer beware is a useful one even today. The context that i write this is with refernce to Fixed Maturity Plans of Mutual Funds that many investors are buying as if it is as good as a fixed deposit. It aint so. FMPs are mutual funds and are subj to market risks. The FMPs are invested in bonds (no problem here, as of now) and other short term borrowings of the corporate India, the trouble is with investments called Pass thru Certificate which are synthetic debt based on retail loan recievables such as personal, auto and other loans. There is no way to ascertain the quality of these papers but they are rated based on the issuing companys ratings. This is risky, certain mutual funds avoid investing in Real Estate assets as the RE companies are borrowing short term and investing in long term projects which can take years to materialise.

So, simply put for 1-2% more ( the FMPs offer around 11% indicative returns ) there is no point in risking 100% capital. The exceptions are FMPs issued by Funds that have no RE exposure or PTC exposure and clearly state so.