Understanding FMP and its benefits

Nutan Gupta

11 May 2017

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.


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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Understanding FMP and its benefits

Nutan Gupta

11 May 2017

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.