Maximum returns with minimum risk — that’s the credo of investment. Fixed Maturity Plans fit the bill perfectly as an investor is exposed to minimal risk while the returns are appreciable. However, one question that has become relevant in the prevalent investment climate is: are FMPs losing their sheen?
What are FMPs?
Fixed Maturity Plans (FMPs) are usually closed-ended income schemes, and as the name suggest, come with a fixed maturity date. FMPs invest in commercial instruments, highly rated corporate bonds and various money market instruments. Unless drastic events unfold, these plans provide assured earnings as they are insulated from the vagaries of the market. The basic rule in the FMP is to park money in an instrument which has a similar maturity date.
Are they losing sheen?
Earlier, FMPs had a tax advantage compared to FDs, which attracted the investors to these schemes. The government’s decision to move the short-term capital gain cut-offs to three years and cut the tax arbitrage that FMPs enjoyed have made these plans an unattractive option when compared to
FDs. However, not all is lost for FMPs. A wobbly equity market and a likely cut in interest rates may put the spotlight back on FMPs in the near future.
Stacking up against FD
The “FMP versus FD” argument is a perennial one among long-term investors. FMPs can be quite different from FDs. Various parameters such as liquidity, earnings, risk, tax and expense should be taken into consideration while drawing a line between FMP and FD.
When it comes to liquidity, an FD has its nose slightly in front. Though both investment options have a tight leash on liquidity, an investor can exit an FD with less damage, but in the case of FMP, he has to shell out an exit load. On the earnings front, FD offers an interest rate in the range of 8.2-8.75% while FMP rates are around 8%.
FMPs are riskier compared to FDs. Though the money is in safe hands while opting for FMP, there is no guarantee hewn in stone. On the tax front, in the short term up to one year, income from FMPs is added to the total income for tax calculation and the tax will be calculated as per the tax bracket of the investor. When it comes to long term, which is three years or more, FMPs have a clear advantage riding on the indexation benefit, which is close to 20 per cent. For FDs, there is no demarcation as short term or long term and interest from FDs will added to the total income.
On the expense front, investment in FMPs normally requires a charge of around 0.5 per cent of the total money invested, while FDs do not entail any such charge.
How to choose FMPs?
To begin with, it is important to know where the FMP funds are invested and an investor should have a fair idea of the risk involved. Choose a maturity period as per your investment needs. Remember, the longer the period, the higher the returns.
Also, compare the rate of return as it will vary as per the portfolio of the underlying instruments. An investor should also carefully read the offer document and know the nitty-gritties of the plan, especially the clause on early withdrawal penalty. It will also be handy to check the past performance of the fund house. This will help to gauge the caliber and capabilities of the fund house manager.
Both FMPs and FDs are investment options tailor-made for risk-averse investors though FMPs comes with a certain degree of risk. The basic principle is to choose a plan that suits one’s investment aspirations based on the quantum of money earmarked for investment.