Fixed Maturity Plans or FMPs: What are they?

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Fixed Maturity Plans or FMPs: What are they?
Fixed maturity plans are closed-ended debt oriented fixed maturity mutual fund schemes. The corpus amount of such schemes is invested in debt instruments, including treasury bills, certificate of deposits, commercial papers (CPs) and corporate and government bonds. Further, the scheme can invest either only in one instrument such as the commercial paper or can also diversify its portfolio to its discretion.

Closed-ended nature of such schemes imply that the interested individual can invest in such instruments only during the time the FMP is open for subscription and no purchase in the FMP is possible post the closing. Also, the allotted units under the plan cannot be sold off to the fund prior to the maturity date. However, the same can be executed at the exchange provided there is a buyer to buy the FMP units.

FMPs available for different maturity terms

The FMPs are offered for several maturity terms; that may be as short as three months or as long as 3-4 years. So, depending on the investment horizon, you can decide on the apt FMP for yourself.

Costs associated with FMPs

FMP being a mutual fund scheme is subjected to some fee that is charged by the investor. Also, to prevent irrational levy of charges, FMPs can charge some maximum % of the average net asset value of the fund.

Yield determination on FMPs

Yield or returns from a FMP can be determined depending on the instruments in which the plan is investing, though there is no guarantee to reap the same anticipated returns. For, instance, if an FMP, invests in Commercial Papers, which are money market instruments issued by large corporations to meet short-term debt obligations, generating yield equivalent to 10.45-10.55%. The yield from the FMP will be calculated by accounting for other costs that the fund would charge to cover its expenses. If that is not given, average expense ratio of the FMP is deducted to determine the annual yield.

Tax efficient instrument

FMPs are comparably more tax-efficient. In case of FMPs with a maturity term of over one-year,investors are allowed the benefit of indexation, wherein returns can be adjusted against inflation. Investment in growth-option of an FMP with a maturity of one year attracts capital gains tax i.e. charged @ 20% with indexation or 10% without indexation. Read to know about indexation. The indexation advantage proves to be even more lucrative during times of high inflation as that spares you of capital gains tax payment or near-negligible payment.

So, FMPs would be a better choice for taxpayers falling in a tax bracket of 20% or high as in bank fixed deposits (FDs) the interest gained is added to the total income and then taxed according to your tax slab. On the other hand, FMPs with low maturity term of less than a year are taxed at the tax rate applicable to you, so the likely return is at par with FDs.

Apt time for investment in FMPs

With a mix portfolio of money-market instruments, FMPs are currently offering a pre-tax return of 9.5%-10%. Investors who lock-in their money at current times are likely to garner returns in double digit in over a years time. Also, as the current economic scenario renders the fate of debt market unknown, FMPs with rather enhanced stability can be chosen.

Story first published: Monday, September 23, 2013, 12:04 [IST]
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