When should you invest in Fixed Maturity Plans?

Nutan Gupta

14 Jul 2017

New Page 1

Fixed Maturity Plans (FMPs) continue to garner a lot of attention among investors in the past few years due to ease of investing, tax benefits and good returns.

Fixed Maturity Plans are close ended debt schemes with a fixed maturity horizon, meaning they are open for investments for a few days and closed until maturity. This time range could be as short as 1 month to as long as 5 years. FMPs are often compared to Fixed Deposits (FDs) due to the tenure. They often invest in money market instruments, bonds, governmental securities, etc.

Low-risk opportunities such as FMPs are a good option for investors who are spooked by the market. It’s always viable to invest in FMPs if you are looking for predictable and better returns. One thing to note is that they don’t get affected by the change in the market’s interest rate. When debt funds benefit from the fall in interest rate, the FMPs won’t join.

Why should you invest in FMPs?

Capital Protection

Due to their investment in debt and money market instruments, they provide less risk of capital loss as compared to equity funds

Low Exposure to Interest Rate Risk

They are not affected by interest rate volatility as they are held till maturity.

Tax Benefit

Tax effectiveness and indexation benefits are seen both in the short-term as well as long-term as they offer better returns as compared to FDs.

Indexation Benefit

Indexation lowers the capital gain, thus lowering the tax.

This allows an investor to take advantage of indexing his investment to inflation for four years while remaining invested for a period of slightly more than three years.

Lower Expense Ratio

There is a cost saving with respect to buying and selling of instruments since these instruments are held till maturity.

Capital Protection

They provide less risk of capital loss as compared to equity funds due to their investment in debt and money market instruments.

Who should invest in FMPs?

  • Investors with low-risk tolerance, looking at stable returns over the medium-term

  • Investors who are not pleased with returns from traditional fixed income avenues like Bank Deposits, Bonds etc.

  • Investors who want to invest money for a fixed tenure to meet certain financial goals in the future

  • Retired persons, instead of making random withdrawals from their savings, can invest to have a flexible and regular income.

  • Investors who have a three-year investment horizon and do not need liquidity during the tenure of the investment

  • Investors in the higher tax brackets, who lose a significant portion of their FD interest to taxes.

When you understand the risk-return characteristics of FMPs, you will realise that FMPs can give better risk-adjusted returns than FDs, even after factoring in the risk-free nature of FDs.

While FDs give us assured returns, FMPs give us an expected range of returns, when we go through the scheme information document and calculate carefully.

In a nutshell

Fixed Maturity Plans:

They are basically the FDs of mutual funds. Close ended debt scheme with fixed maturity.

Why FMP:

Low risk, tax benefits, ease of investing, good expected returns.

The more you know about FMPs, the more you realise that they are still excellent alternatives to FDs!


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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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When should you invest in Fixed Maturity Plans?

Nutan Gupta

14 Jul 2017

New Page 1

Fixed Maturity Plans (FMPs) continue to garner a lot of attention among investors in the past few years due to ease of investing, tax benefits and good returns.

Fixed Maturity Plans are close ended debt schemes with a fixed maturity horizon, meaning they are open for investments for a few days and closed until maturity. This time range could be as short as 1 month to as long as 5 years. FMPs are often compared to Fixed Deposits (FDs) due to the tenure. They often invest in money market instruments, bonds, governmental securities, etc.

Low-risk opportunities such as FMPs are a good option for investors who are spooked by the market. It’s always viable to invest in FMPs if you are looking for predictable and better returns. One thing to note is that they don’t get affected by the change in the market’s interest rate. When debt funds benefit from the fall in interest rate, the FMPs won’t join.

Why should you invest in FMPs?

Capital Protection

Due to their investment in debt and money market instruments, they provide less risk of capital loss as compared to equity funds

Low Exposure to Interest Rate Risk

They are not affected by interest rate volatility as they are held till maturity.

Tax Benefit

Tax effectiveness and indexation benefits are seen both in the short-term as well as long-term as they offer better returns as compared to FDs.

Indexation Benefit

Indexation lowers the capital gain, thus lowering the tax.

This allows an investor to take advantage of indexing his investment to inflation for four years while remaining invested for a period of slightly more than three years.

Lower Expense Ratio

There is a cost saving with respect to buying and selling of instruments since these instruments are held till maturity.

Capital Protection

They provide less risk of capital loss as compared to equity funds due to their investment in debt and money market instruments.

Who should invest in FMPs?

  • Investors with low-risk tolerance, looking at stable returns over the medium-term

  • Investors who are not pleased with returns from traditional fixed income avenues like Bank Deposits, Bonds etc.

  • Investors who want to invest money for a fixed tenure to meet certain financial goals in the future

  • Retired persons, instead of making random withdrawals from their savings, can invest to have a flexible and regular income.

  • Investors who have a three-year investment horizon and do not need liquidity during the tenure of the investment

  • Investors in the higher tax brackets, who lose a significant portion of their FD interest to taxes.

When you understand the risk-return characteristics of FMPs, you will realise that FMPs can give better risk-adjusted returns than FDs, even after factoring in the risk-free nature of FDs.

While FDs give us assured returns, FMPs give us an expected range of returns, when we go through the scheme information document and calculate carefully.

In a nutshell

Fixed Maturity Plans:

They are basically the FDs of mutual funds. Close ended debt scheme with fixed maturity.

Why FMP:

Low risk, tax benefits, ease of investing, good expected returns.

The more you know about FMPs, the more you realise that they are still excellent alternatives to FDs!