Attractive yields and conducive interest rate scenario make FMPs a hot pick for investors. FMPs are targeting to fill up the vacant investment space created by the rise in interest rates.
What are FMPs?
Fixed Maturity Plans (FMPs) are close ended debt funds, which invest in securities that have maturity profiles in line with the tenure of the FMP portfolio. The maturity profile of FMP can be as short as 90 days. It can also be long enough to span more than three financial years. FMPs with shorter duration offer flexibility to perform better under the rising interest rate scenario. Further, some Hybrid FMPs hold equity to a certain extent.
Why invest in FMPs?
There are number of reasons warranting investors to consider FMPs compared with other bank instruments. This starts right from low risk to better tax treatment
The amount invested in FMPs is protected, as the FMPs invest these amounts in debt and money market instruments, which have a fixed maturity date. Further, investments are held until maturity, making the FMP less sensitive to the volatility in interest rates.
Better tax treatment:
The next big advantage for any investor to remain invested in FMPs is the better tax treatment compared with Bank FDs.
Interest rate risk
FMPs are free from interest rate risk, as they invest in instruments held until maturity, ensuring a fixed rate of return with low-to-nil portfolio churning.
Low expense ratio
FMPs carry a lower expense ratio due to lower management cost involved in managing the FMP portfolios. These funds rarely have a tradable portfolio.
Low credit risk
FMPs also mitigate the credit risk prevailing in the debt market by investing in only those instruments having the highest ratings.
Listing and liquidity
FMPs are listed on the exchanges to accord liquidity to the investors.
Where do FMPs invest?
- FMP portfolio holds debt instruments, which have substantial liquidity
- Certificate of deposits
- Commercial papers
- Treasury bills
- Collateralized borrowing andlending obligation
- Government securities
- Non-convertible debentures
- Floating rate instruments
- Securitized assets and pass through certificates.
Indexation benefits and tax efficiency
FMPs with more than oneyear’s tenure have the benefit of indexation. Under this, the initial investment amount is inflated by the existing rate of inflation. This exercise increases the base amount over which capital appreciation benefit is calculated. Higher base decreases the taxable profit. Thus, investor benefits from lower taxation. If the plan tenure spans more than two financial years, it qualifies for a double indexation benefit.
Why are FMPs superior to bank fixed deposits?
Current FMP yields compare to a bank FD with 1-1.5 year tenure would provide investors with better pre tax returns. While interest income from bank FD attracts more tax,FMPs return a comparatively higher post tax income for the same amount invested.
Going forward, we believe high interest rates are here to stay for near-to-medium term. The investors can grasp this opportunity and invest in Fixed Maturity Plans (FMPs).
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.