The Securities and Exchange Board of India is considering the possibility of imposing a cap on the quantum of investments that a mutual fund scheme can put into fixed deposits.

Sebi chairman G N Bajpai in a recent interview with Business Standard, agreed that probably there was a case for restricting investments in fixed deposits. The Association of Mutual Funds of India, being prodded by some of its members, is also learnt to be taking a look into the matter.

At present, Sebi regulations do not restrict investments in fixed deposits though in the case of equity schemes the Sebi regulations specify that investments in fixed deposits can be made pending deployment in the equity market.

However, if in the offer document of the scheme the fund house specifically lays down investment in fixed deposits as one of its objectives then it has every right to put money in them, since it has been upfront about its intentions.

However, a small section of the industry is not very happy about it. According to the head of a mutual fund house, "investors are paying service charges and other loads in order to get the expertise of the fund manager. Investing in fixed deposits requires no expertise."

This is especially true of fixed maturity plans, where a considerable portion of the portfolio is in fixed deposits, of mostly banks.

In fact, it is a quid pro quo arrangement between the fund house and the banks, which subscribe to the plan, which in turn is deployed in the banks' fixed deposits. FMPs are allowed to invest in short-term debt instruments of corporates and banks.

Incidentally, FMP portfolios are not made public and Sebi is planning to do something about this as well.

While even the regulator holds the view that there is nothing wrong in a fund investing in fixed deposits, the general feeling is that it should be an exception rather than the norm.

The whole issue is of one of ethics and whether a fund should be just putting the money, which an investor has entrusted to it, in fixed deposits.

In focus

• At present, Sebi regulations do not restrict investments in fixed deposits
• Fixed maturity plans put a considerable portion of the portfolio in fixed deposits of banks mostly
• Investment in FDs should be an exception than a rule, feels industry