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Fixed maturity plans offer tax advantage over fixed deposits
December, 03rd 2013

Bank fixed deposits (FDs) are one of the most popular in vestment vehicles in India. One of the prime reasons for this popularity is that FDs give guaranteed returns. If you keep Rs 10,000 in a bank FD for one year at 10% rate of interest, at the end of the year you will almost definitely get Rs 11,000 from the bank. Another reason for this popularity could be attributed to investors' lack of knowledge about other products which are equally good or even better than FDs in some respect.

One such product is a fixed maturity plan (FMPs), a type of debt mutual fund with a fixed tenure that has gained popularity in the last two years, more so after the rate of interest in the economy went up to keep pace with the rising rate of inflation.

FMPs are debt mutual fund schemes with a maturity ranging from as little as 15 days to several years. How ever, the popular ones are usually of 365 days or a little more. In these funds once you invest your money, although all are listed, but the exit opportunities are very low.

FMPs invest in debt market instruments like treasury bills, bonds, government securities, money market instruments which have very short-term fixed tenures Usually, FMPs provide capital protection along with appreciation. Although FMPs can be both open-and close ended, but most in India are closed-ended ones.

"Until last year, fund houses were not allowed to disclose instruments where funds are getting invested through FMPs. In order to make investors calculate the yield that FMP investments would generate, Sebi has allowed AMC' to disclose the portfolio," Rashmi Roddam, director, Wealth Rays Group. "Returns in FMPs are considered to be indicative and not assured (like FDs) because returns from FMPs depend on the returns of instruments that FMPs in vest in," Roddam said.

The tenure of an FMP directly depends on the maturity period of instruments where the funds are invested For example, if a 91-day FMP is invested in 95% in Treasury bills, then the fund' yield will be arrived at based on returns that these Treasury bills generate during this period of time.

There is another class of FMP that is gaining popularity of late called interval funds. In these FMPs, unlike the pure-play ones, investors get exit opportunities at fixed intervals. "Interval funds are FMPs that have lock-in periods of a quarter, half a year or a year with maturities on specific dates," said Roddam. In vestments in such funds could be utilized for planned expenses like children's school fees insurance premiums. "Since these funds are locked-in for fixed periods, there is no fear of spending these funds for day-to-day expenses and also will come handy at the right time instead of looking out for funds at the last minute," Roddam said.

Although bank FDs and FMPs are both similar in the sense that while investing in them you kind of know the returns, but the guarantee of returns in FDs is not there in FMPs. Instead you can only get an indicative return from FMPs. Also you can look into the portfolio in which your money is being invested and have a good idea about the risks associated with your investment in FMPs.

Reasons for investing in FMPs

One of the main drivers for investing in FMPs is the tax efficiency compared to other similar investments. However, to gain the tax advantage you should invest in FMPs of one-year tenure or more. If you invest in FMPs of less than one year, the gains will be added to your total income and taxed at the income tax slab you are in.

One the other hand, if you invest in March of one year and stay invested till April of the following year, that is about 400 days, you get to enjoy double-indexation benefit. And what's even better, if after double indexation you witness a loss, you can also set off such losses against any other short- or long-term capital loss over the next eight years.

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