They are a good alternative for FDs for investors with a low-risk appetite. Read on to know more.
Are you tired of the traditional investments but at the same time do not possess a high-risk appetite? Then Fixed Maturity Plans (FMPs) might just be the right instrument for you as it is a safe investment with moderate returns and tax benefits.
But what are these FMPs and how can one invest in them? Find out.
What are Fixed Maturity Plans?
Fixed Maturity Plans are closed-ended debt mutual funds with a fixed maturity horizon which ranges from as low as one month to five years. They are often compared to bank fixed deposits due to their tenure. These funds put their corpus in money market instruments, corporate bonds, commercial papers and government securities. FMPs pose a good option for those who seek assured income from their investments, an alternate to FDs, whose recent returns you may not be happy with. And unlike equity funds, the risk of capital loss is relatively lower in FMPs.
For FMPs, fund houses typically set a target amount for a scheme, which gets informally tied up with borrowers before launching it. And since the fund house knows the rate of interest that it would earn, it provides an indicative rate of return to its investors. Since the commission on FMPs is low, these schemes are not advertised widely.
Post-2014 budget, the subscription of FMPs have fallen sharply mainly due to the withdrawal of tax arbitrage benefits, but it still holds its ground of being a low-risk investment option with decent returns. FMPs have a minimum tenure of three years.
Who Can Invest In Fixed Maturity Plans?
For those who have low-risk tolerance and looking for a stable return, FMPs act as a good investment option. Unlike FDs, these schemes do not give assured returns, but informed investors can form a reasonable expectation about their range of returns from FMP investments. For investors falling in the higher tax bracket and who lose out a significant portion of FD interest to taxes can opt for FMPs. Remember though, that while putting your money in FMPs, you should be prepared to have a three-year investment horizon and forget about liquidity during this tenure.
The best-performing FMPs can give better risk-adjusted returns than most bank fixed deposits if recent data is anything to go by. FMPs have low-interest rate risk. In today’s scenario where interest rates have bottomed out and may start rising (thus making long-term debt funds volatile), FMPs will perform relatively better. Portfolio allocations of FMPs tilt towards debt instruments with high credit ratings (Sovereign, AAA, AA, etc).
Tax Benefits For Investing In FMPs
FMPs offer great tax benefits than a FD or any short-term debt fund. Although they are taxed as per your tax slab rate, the indexation benefit helps to lower capital gains and thereby lower the tax liability. FMPs also offer double indexation benefit, which further helps reduce the taxation of your returns.
The good news is that bond yields are up and credit environment is improving – which will enable three-year FMP to yield good returns in the tune of 8.25% to 8.5%. Considering that this is a good 200 basis points spread over most FD rates of the same tenure, it makes sense to allocate some part of your funds to FMPs. But remember to opt for large AMCs who have strong risk control in place.