In the last few months, when Fixed Maturity Plans (FMPs) of mutual funds were in some serious trouble, I was speaking to a lot of industry experts. The general view was that the product was suffering from a perception problem.

In the last two years, when interest rates were on the rise, FMPs became a big hit with investors. This is because they were giving better returns than fixed deposits (FDs). Plus, there were tax benefits as well.

When the marketing people realised this, they went the whole hog. But as usual, they went for the easier option – corporate money. And to attract those crores in a single deal, fund houses were forced to compete. The result: Each fund house was trying to outdo the other, in terms of the interest rate being offered. No wonder, fund managers found themselves under constant pressure.

In defence of marketing people, once another fund house offered a higher rate, it became a benchmark and both distributors and investors started asking for that rate or even more.

This led to a situation where even a short-term debt fund manager was forced to invest in longer-term or riskier papers to hike returns. And that is a perfect recipe for disaster. “The marketers do not realise that to give 0.5 per cent more, I have to put the entire portfolio at risk,” said a former debt fund manager.

When the going was good, no one complained. But as fund houses have found during the recent run on FMPs, liquid and liquid-plus funds, things can really go crazy when there all corporates hit the exit button at the same time.

There isn’t much of a secondary market for many of the underlying papers of these schemes, especially commercial papers and pass through certificates. And the few buyers would want their pound of flesh and purchase at a hefty discount.

Now, the market regulator, the Securities and Exchange Board of India (Sebi) has tried to solve the problem by introducing a “no exit clause” from FMPs. Instead, they will have to be listed. I do not know whether it will help or not.

But I am sure that FMPs will not stay the same. The rates of return they are offering are already down from 12 per cent in October to 7.5 per cent now. Also, in a lower interest rate regime, gilt funds will always be more attractive. But what has hurt fund houses the most is the overall negative sentiment. Especially, the corporate sector’s sentiment, which accounts for over 60 per cent of the money, in FMPs.

The lessons to be learnt are many. For one, excessive marketing and the rush to increase the asset base can hurt a decent product. Also, over dependence on corporate money can be counter productive. And most importantly, running after retail investors may be costlier but when fund houses lecture investors that money can only be made in the long term… they should be viewing their own business in a similar manner.

Already some CEOs and marketing heads are talking about moving from excessive exposure in debt to equities. Haven’t we heard it all before?