Where do FMP's invest?
They invest in fixed income instruments, like certificate of deposits (CDs), commercial papers (CPs), treasury bills, money market instruments, corporate bonds and securitised debt. It depends widely on the tenure of the FMP where fund manager invests into instruments with similar time frame.
They come with different maturities such as monthly, quarterly, half-yearly, annually and even plans with maturity of more than 1 year.
As these are close-ended schemes. There is no entry load for investment into FMP but they do have an exit load depending when it is being redeemed.
Investors can withdraw their investment from the fund before maturity but they have to bear an exit load i.e. penalty for early withdrawal.
Returns & Tax implication
These are tax-efficient schemes which do not provide guaranteed return but their returns are favourable and steady. They normally have higher tax efficient returns compared to bank deposits and other liquid funds.
Dividend in the hands of the investor is tax-free but the investors" will receive the same after deduction of dividend distribution tax (DDT).
- If you invest in the growth option of the FMP for less than a year, the gains are added to the investor's income and taxed at the investor's income tax slab rate.
- If you invest in the growth option of the FMP for over a year, you pay either 10% capital gains tax without indexation or 20% with indexation. Indexation is the process by which inflation is taken into account while computing the tax liability.
Benefits of investing into FMP:
- Capital Protection: Investor can reap the benefit of capital protection as major portion of investment of FMP is into debt and money market instruments so there is low risk of capital loss.
- Low interest rate risk: FMPs are least exposed to interest rate risk as the fund manager would normally hold the instruments till maturity for fixed rate of return. This makes FMPs a least risk exposed option when interest rate fluctuate.
- Low liquidity risk: Most of the FMPs invest in high rated bond so the liquidity risk is minimum.
- Portfolio balancing: FMP can also form a part of the equity investor's portfolio. The part of the portfolio which should be kept in high liquid form for a rainy day (approximately 5% of the portfolio value) can also park a part of the sum here.
- Double indexation benefit: FMPs also provide double indexation benefits to investors. Investors can invest in these schemes prior to the end of one financial year and should redeem just after the beginning of next financial year, it gives them the benefit of taking into consideration the inflation rate for both years that helps them save taxes on their FMP investments.