Business & Finance Stocks-Mutual-Funds

Fixed Maturity Plan - Mutual Fund Investment!

FMPs are the equivalent of a fixed deposit schemes, with a little difference that The FMP's returns are only indicated and not €guaranteed', Since the fund house knows the interest rate that it will earn on its investments, it can provide €indicative returns' to investors. FMPs are debt schemes, where the corpus is invested in fixed-income securities. The tenure can be of different maturities, from one month to three years. They are closed-ended in nature, which means that once the NFO (new fund offer) closes, the scheme cannot accept any further investment. These FMP NFOs are generally open for 2 to 3 days and are marketed to corporate and well-heeled, high net-worth individuals. Nevertheless, the minimum investment is usually Rs 5,000 and so a retail investor can comfortably invest too. The actual return can vary slightly, if at all, from the indicated return. Against that, a bank fixed deposit exactly prints the amount which is due to you on maturity on the FD receipt. However, FMPs do earn better returns than fixed deposits of similar tenure.

Key Benefits of FMPs

There are several benefits of the FMPs which make them a lucrative option available in the market. The most important advantage of the FMPs is that for tax purpose they are treated at par with fixed deposits. Since they are basically debt funds they also enjoy all the benefits of the debt funds in terms of short terms capital gains as well as long term capital gains. For the short term capital gains, the income from FMDs as in the case of any debt oriented fund is added to the annual income and the taxation is done as income tax. In case of the long term capital gains, the income from FMPs, as in the case of all debt oriented funds, is taxed as the higher among the two - 10% without indexation and 20 per cent with indexation.

Comparing the FMPs with Bank Fixed Deposits

In order to understand the basic advantages of investing in fixed maturity plans as against conventional bank fixed deposits we will have to compare the returns from both these instruments both pre tax as well as post tax. Assuming an initial investment of Rs. 10000/-, let us study the variations in returns in different options.

In this table the various tax implications in different schemes of FMPs as compared to the tax implication in a bank fixed deposit is illustrated on an initial investment of Rs. 10000/- with a interest rate of 10%. Important derivations from the above table of comparison are as follows:

€ The net returns from FMPs far exceed that by any bank fixed deposit.

€ The dividend option is better when buying FMPs for less than a year.

€ The growth option is better when buying FMP for more than a year.

€ Maximum double indexation benefit can be achieved by buying a FMP towards the very end of a financial year which is eligible for redemption at the commencement of a future financial year.

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