Fixed maturity plans are hot with investors

CHENNAI: If you track mutual funds, chances are high that you would have seen at least one brochure advertising the benefits of investing in fixed maturity plans or FMPs in the last 6-8 months!

AIG, Lotus India AMC, DSP Merrill Lynch MF, Fidelity ... the list seems endless. As stocks become the most hated word, FMPs have emerged as favourites by simply combining small investments , tax savings and assured returns.

Sample this: Over 800 schemes, aimed at retail and institutions, in 2008 alone have been launched and have mopped up a whopping Rs 44,000 crore (or $10 billion) of investor wealth under such schemes. All this for 10.6- 11.75% net indicative yields.

"FMPs offer good fixed income . Their portfolios do not change much. Risk-averse investors and especially those falling into the higher tax brackets should go for these products," Dhirendra Kumar, CEO of independent mutual fund research company Valueresearchonline said.

With more than 27 fund houses having launched FMPs with tenure ranging from 3 months to a few years, FMPs are being lapped up all and sundry as a viable alternative to fixed deposits in banks. The minimum investment of Rs 5,000 is attracting scores of smaller investors. By investing in debt instruments with the intent of holding them to maturity, FMPs are appearing to be a safer haven for all who are fed up with falling share prices.

Assured returns are the key. However, the investment horizon has to be given due importance, experts feel. "Anybody with a one-month horizon could go in for liquid funds but those with 3-9 months time may opt for FMPs," Mahadevan V, chief executive officer of investment advisory firm Wealth Advisors said.



The other factor that is tilting the scales in favour of fixed maturity plans over fixed deposits is the lower tax incidence. When invested in a fixed deposit, the interest gets added to his/her income. This can mean an outgo of 33% tax for deposit holders in the highest tax bracket. But in FMPs, which have tenure of more than a year, investors can choose to take all gains as capital appreciation - this makes the taxation rate only 10% without cost indexation benefit (adjusting for inflation ) or 20% with indexation.

So, what about FMPs with tenure of less than a year? The tax angle survives - if the investor, in short-duration FMP schemes, receives the gains in the form of dividends . Then, individual investors will get taxed at 12.5% of the returns.

Courtesy: http://timesofindia.indiatimes.com