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fmp

What is FMP(Fixed Maturity Plan)?

Investing in instruments that carry low risk and generate fixed returns is preferred by conservative investors. The reason for this preference is that such investments allow you to steadily build up a corpus over a period of time.

Investing in a Fixed Maturity Plan (FMP) comes under this approach. Fixed Maturity Plans are close-ended debt mutual funds, which invest in fixed income securities that can give predictable returns in line with the maturity of the plan. These plans work well for you if your investment horizon is short to medium term.

Fixed Maturity Plan (FMP) Returns

Initially, the strict bearing of SEBI (Securities and Exchange Board of India) to not disclose the asset portfolio in close-ended mutual funds, made it difficult for potential investors to get any clarity on the returns that they would get when investing in FMPs. But in 2011, they relaxed this rule so that investors can now be well aware of the asset allocation in such close-ended schemes.

If you are investing in an FMP, knowing and understanding the asset allocation should be your priority, as you can predict the maturity on returns by analysing the current yield of the assets.

*Current Yield – Current price of a fixed income security.

FMPs generally invest in the following securities –

  • Bonds
  • Non-convertible debentures
  • Commercial Papers
  • Certificates of deposits

 

How do FMPs fare in comparison to Fixed Deposits?

Before the budget 2014-2015

Making a decision between a Fixed Deposit and an FMP was difficult. Fixed Deposits obviously scored due to assured returns and no risks involved. Fixed Deposits also provided the option of liquidity which is next to null in FMPs.

But FMPs had a considerable edge over a traditional Fixed Deposit, in the taxation on these investments. A Fixed Deposit is taxed according to an individual’s income slab and for those who are in higher tax brackets, the taxes you end up paying on a Fixed Deposit are considerable.

In comparison, a Fixed Maturity Plan had indexation benefits. For any investment above 1 year in tenure, the growth your investment saw was considered as Long Term Capital Gains (LTCG) and were taxed at either 10% or at 20% with indexation which effectively results in lower taxes upon maturity.

For individuals whose annual income was in the 20% or 30% tax bracket, these Fixed Maturity Plans represented a highly beneficial tax saving investment option.

After the budget 2014-2015

The changes introduced by the new budget (2014-15) has seen an increase in the tenure for availing long-term capital gains (LTCG) from 1 to 3 years. Additionally the profit is to be added in total income for tax calculation. The LTCG tax for all non-equity-oriented MFs (mutual funds) will be at a flat rate of 20% as against 10% at present, and the holding period to qualify as LTCG is now 36 months as opposed to the 12 months that it earlier was. This has reduced the tax arbitrage between Fixed Deposit and Debt mutual funds making FMPs, nearly negating the tax advantage for corporate or individual investors to pick debt funds over fixed deposits.

Now that we have understood the basic facts about fixed maturity plan. Let read more on monthly income plans & it benefits.

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