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Craze for serial plans

Aabhas Pandya

Thanks to the volatility in the debt markets, serial plans seem to have caught the imagination of some asset management companies. If cash funds were launched to veer around the lock-in in money market mutual funds, serial plans have propped up to guard against interest rate gyrations.

Apart from Kotak Mahindra and Dundee AMCs, which have introduced a serial option in their bond funds, a few other fund houses are contemplating the launch of this option. In fact, Prudential-ICICI shortly plans to unveil an umbrella serial fund, which will offer plans of varying maturities. However, not all AMCs are rushing to launch a serial plan. More on that later but first, what are serial plans and how are they different from the bland debt fund?

"The charm of serial plans lies in their insulation to interest rate sensitivity. For instance, if you invest in a one-year serial plan, the fund manager will lock your investments in instruments, which will mature just before the maturity of your serial plan. Thus, if you stay till maturity, you will insulate yourself from any price or interest rate risk and there will be no impact of volatility," says a fund manager. "Serial plans have an implicit assured return since once you lock your investments at a particular yield and hold the bonds till maturity, you will earn that yield, volatility or no volatility," says Nilesh Shah at Templeton.

Serial plans are open-end and investors can exit at will. But, any premature redemption could bring in interest rate risk and eat into returns. Apart from insulating investments from interest rate changes, serial plans charge lower expenses than normal bond funds. For instance, the annual expense in K-Bond 2001 (maturing in December 2001) is only 0.8 per cent.

In fact, fund managers can also generate a higher return for investor as per his risk requirement. Since an investor will hold on to a bond till maturity, a fund could even take an exposure to a BBB rated company and earn higher interest income. "Since I know there will be no redemption and I am okay with even a BBB rated company, I can generate higher return via that," says Shah.

However, some asset management companies are wary of offering serial plans and fear that Sebi may raise an objection. "How about the watchdog? What will they think about this misuse? The pitfall is that Sebi might object to the launch of such funds since they offer implicit assured returns." While some funds have gone ahead and launched a serial plan on a verbal assurance. "We will launch a serial plan only if we receive a written approval,'' says an official with an asset management company which launched a serial plan recently. Add to it, most investors in serial plans are comfortable with the growth option (which is more tax efficient) rather than the dividend option (where payouts attract 22% dividend tax) since they are anyway locking money for a fixed duration. "Since these funds shield against price movements, they are expected to attract large inflows and the government could lose on dividend tax if most of the investors invest in the growth option," says the marketing head of a mutual fund.

Source: Value Research

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