Fixed Maturity Plans (FMPs) are on the way to become the latest alternative investment option to conventional fixed deposits (FDs).
Fixed Monthly Plans (FMPs) are closed-end debt fundshaving a fixed maturity period. Unlike other open-ended debt funds, FMPs are not available for subscription continuously.The fund house comes up with a New Fund Offer (NFO) which will have an opening date and a closing date. You can invest in an NFO only when it is available for subscription. After the closing date, the offer to invest ceases to exist.
FMPs usually invest in debt instruments such as certificates of deposit (CDs), money market instruments, corporate bonds, commercial papers (CPs), and bank fixed deposits. The fund manager invests in instruments having similar the desired maturity period.
For example, if FMP is for five years, then the fund manager invests in a corporate bond having a maturity of five years.
Unlike other debt funds, the fund manager of FMP follows a buy and hold strategy. There is no frequent buying and selling of debt securities like other debt funds. This helps to keep the expense ratio of FMPs at lower level vis-a-vis other debt funds.
Being a debt instrument, FMPs and FDs are similar in many ways. Both require you to stay invested for a fixed duration. Both of them are available in varying maturities to suit your convenience.However, FMPs are a contrast to FDs when you look at it from a returns perspective.
Unlike the guaranteed returns that reflect on the FD certificate, FMPs offer an indicative yield – the returns provided by FMPs are not assured but indicative. It means that there is a chance of the actual returns being higher or lower than the returns indicated during the NFO launch. Please see the table below to understand this better:
|Returns||Indicative Returns||Assured Returns|
|Tax||1. Dividend Option - DDT tax|
2. Growth Option - Tax on capital gains
|Interest earned is added to your income, and the income is taxed accordingly|
|Liquidity||Restricted liquidity||Ease of premature redemption, higher liquidity|
The value of your FMP is reflected by the Net Asset Value (NAV) of the fund. You will get to know the NAV of the FMP daily. Do note that NAV of the fund fluctuates every day as interest rate movements in the economy can affect it. This makes FMPs riskier than FDs.
FMPs are ideal for those investors, who need returns higher than a regular FD but can accept the frequent NAV fluctuations. Compared to equity funds, FMPs are low risk-low return investments. Due to the restricted liquidity, investors who are ready to park their money for the NFO tenure can invest in this scheme.
While FDs assure returns, FMPs indicate a probable return. You need to understand the difference and expect a small change in the returns indicated during the initial buying phase.
FMPs can also be useful for investors in the high-income tax brackets. These investors usually end up paying massive amounts as the tax on the interest earned on the FDs held by them. FMPs give them the option of making similar returns at a much lower tax rate (due to indexation benefit in long-term capital gains).
Look for the investment objective of the scheme, indicated yield and investment strategy. Once you are in sync with these, then invest an amount that you can leave invested for three years and reap tax-efficient returns.
Post-2014, due to a change in the tax treatment of debt funds, investors need to stay invested for at least three years to take the benefit of indexation on long-term capital gains tax. Hence, FMPs are ideal for those who have no liquidity requirements for at least three years.
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