Understanding FMP and its benefits
11 May 2017
Nutan Gupta
New Page 1
Fixed Maturity Plans, or commonly
known as FMP is a close-ended mutual fund scheme with a fixed maturity. FMP usually
invests in instruments that are equal to its own tenure. This means an FMP with a tenure
of 1126 days would invest in an instrument that matures within 1126 days or less.
Why people invest in FMPs?
Fixed Maturity Plans offer returns that are risk adjusted. You can also
get tax benefits on it. Mutual funds invest in
securities that are not easily offered to retail investors. Thus, you can get better
credit quality. The interest rate risk is also managed by the securities with the same
maturity plan as that of the scheme.
What do investors get from FMP?
Protection from capital: FMP invests in debt
instruments. Hence, the risk of loss of capital is relatively lower than that in equity
funds.
Ideal for long-term FMPs: Investments that are greater
than 36 months are often ideal due to minimum exposure to market risk, ability to park
funds to achieve long-term goals, and potential to earn steady returns on investment in
FMPs.
Better taxation benefits: FMP offers better returns as
compared to FDs and ultra-short-term debt funds. This is possible due to the indexation
benefit. Since indexation lowers capital gains, it translates into lower tax.
If you choose ‘Dividend’ option, there may be no tax for you
as investors as you are getting the returns in dividends. However, the mutual fund
companies would have to pay the Dividend Distribution Tax (DDT) along with surcharge and
cess.
If you choose the ‘Growth’ option, you may be eligible for
capital gains tax. For short-term capital gains of less than 36 months, you may be charged
according to your own income slab rate. If you opt for long-term capital gains of more
than 36 months, you would be taxed at 10% and 20% without or with indexation respectively.
For example, if you take a 36-month FMP in May 2017 that is FY17-18, it would mature in
May 2020 that is FY20-21. Since the purchase and sale years are in different financial
years, you can enjoy the benefit of double indexation. This would help you reduce your tax
liability to a great extent.
What does an FMP comprise of?
It comprises of the following:
Sr. no.
|
Debt-market securities
|
1
|
Non-Convertible Debentures(NCDs)
|
2
|
Government Bonds
|
3
|
Highly rated securities like AAA rated
Corporate Bonds
|
4
|
Treasury Bills (T-bills)
|
5
|
Commercial Papers(CPs)
|
6
|
Certificates of Deposit (CDs)
|
7
|
Bank FDs and other money market
instruments
|
Points to remember before investing in FMPs
It is essential to know where the FMP is investing. This is because the
credit worthiness of the fund’s assets is directly dependent on the quality of the
portfolio.
Ensure that you read the Scheme Information Document (SID) carefully.
It would give you an idea about the fund manager’s capabilities.
Are there any downsides of FMP?
Like every other thing, FMP too has its own share of shortcomings.
Since it is a close-ended scheme, you may not be able to redeem it before maturity or
expiry of its term. All FMPs are mandatorily listed on the stock exchange. If you still
wish to redeem it, you might have to sell it on the stock exchange on which the units are
listed. Since these units are rarely traded, it could make your FMPs illiquid in times of
need.
In conclusion
FMPs are great investment tools if you are looking for good returns and
tax benefits. The close-ended schemes can only be redeemed after the term. So, once the
term is completed, all the capital along with the interest earned is credited back to the
investors. The taxation in FMPs would depend on the investment option chosen by you. This
could be either dividend or growth. Thus, FMP is an ideal investment option for all those
investors who wish to have stable returns from a
debt investment.