The mutual fund industry is under pressure and not just from falling markets. Fixed maturity plans, which have garnered Rs 102,133 crore (Rs 1021.33 billion) of average assets under management, are facing the prospect of rising defaults on their investments in the real estate and non-banking financial companies. This implies that if there are redemption pressures from their corporate and retail clients, these FMPs would have to raise cash from other resources to meet the demand.

FMPs contribute almost 19 per cent to the Rs 5.29 lakh crore (Rs 5,290 billion) average assets of the industry. Though mutual funds have turned cautious about investing in these sectors since early 2008, the fear is that the money that has already been invested could be in for some trouble in terms of payment delays.

Sources said some of the leading real estate companies have defaulted on their repayments and are seeking rollovers. And though there hasn't been any huge redemption pressure, mutual funds are gearing up for it, especially from companies that have invested in the FMPs.

According to senior banking sources, a large fund recently had to borrow on the call money market at over 20 per cent to meet redemption pressures. Last month, a medium-sized fund faced redemption pressure on its FMP from high net worth individuals, when it was declared that the company was being taken over.

"When investors are willing to even shell out 2 per cent as exit load to redeem, it becomes very difficult for us," said a fund manager. Many others have resorted to rolling over schemes to avoid paying their clients.

Mutual funds, on their part, said investor wealth is not at risk at the moment. "There may be isolated instances but the overall system is sound," said the head of a fund house.

Though the industry has not seen any pressure from corporate clients as of now, the head of a financial conglomerate said there have been some withdrawals by companies in the last few weeks to meet their immediate liquidity needs. Over the last fortnight, the liquidity in the market has been tight as companies had to pay advance tax and there were large borrowings by cash-strapped oil and fertiliser companies. As a result, banks borrowed heavily from RBI and call rates touched 17 per cent.

A senior executive in the industry claimed that around 10 to 15 per cent money of the total AAUM has been invested in real estate and NBFC papers. Over the last two years, the real estate sector was offering 1-2 per cent higher yield than the market, luring many fund managers to invest almost 60 to 70 per cent of their corpus in them.

In fact, for the past eight to 10 months, most fund managers have stayed away from these papers. Some like UTI Mutual Fund stopped investing in them since December 2007 and Kotak Mutual Fund even declared in the offer documents of some of their FMPs that they would not have any exposure to real estate and NBFCs.

Another important development in the recent months has been that all fund houses have started declaring their FMP portfolios to investors. Earlier, only a few leading funds would do so.

The threat of the exit of large investors accentuates the problem for FMPs as there will be pressure or withdrawal. Also, little money will trickle in from fresh investors to counter the outflows.

What are FMPs?

FMPs are funds in which investors park their funds for one to six months, sometimes for more than a year. These plans invest in corporate bonds, bank deposits and commercial papers. The longer tenure is offered to take advantage of double indexation benefits.

This implies that if someone invests in an FMP for 13 months, say, between March 2008 and April 2009, his capital gains will get indexation benefit for 2007-2008 and 2009-2010. So his tax liability would go down substantially. That is why retail investors prefer to invest in the longer- term FMPs.