For those who have a longer term horizon and can take in a slight risk, here is discussed another investment option which can serve you well at current time when interest rates are being trending lower to spur the economy.
FDs which were the sole investment destination for most retired and risk-averse folks are finding it hard to sail through the current time with low interest income. Also, bank FDs of lower tenure are fetching lower interest than savings account interest rate.
So, at such a time, you can also consider investment in fixed income instrument from the mutual fund space called as fixed maturity plans or FMPs.
What Are FMPs or Fixed Maturity Plans?
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 at its discretion.
Features of FMPs
Investment only during the time NFO or new fund offer is open:
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.
Exit possible only upon maturity:
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.
Available in various maturities:
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.
FMPs versus Fixed deposits of bank are available for diversification
Here as against fixed deposits which are bank special, these schemes can invest corpus across different issuers and hence diversify risk across good-quality commercial paper and other debt instruments. In the case of FDs, investors are exposed to credit risk over and above the insurance extended against deposits of Rs. 5 lakh.
Return from FMPs:
Based on the offer document which illustrates the security the scheme would invest in and the yield, the return on such products is pre-determined with no deviation.
Further the securities lapped up as part of the scheme cannot have a tenure more than the scheme's tenure.
Here say if the fund invests 95% of the funds in instrument bearing 11.45-11.55% return then overall the return on an annual basis from the FMP shall be 10.88% (0.95 * 11.45)
Also, a fee is charged for managing the scheme.
In case of FMPs with maturity over 3 years, there is provided indexation benefit when computing tax. But FDs irrespective of the maturity time, attract taxation on interest earned as per the slab rate of investors.