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Its really elementary, FMPs probably offer better post tax returns than bank FDs for most classes of investors but could be theoretically riskier Confused, by the above explanation? Read on, on reasons why FMPs are generally than bank FDs
FMPs typically offer an expected rate of return, while the bank fixed deposits have a fixed rate of return
For example, if you invest in bank fixed deposit, you know exactly how much interest you will get at the deposit maturity date. Since fixed maturity plans are also close-ended, the mutual funds typically have a pretty good idea of the expected rate of return, since they lock into corporate debt or Govt securities for a fixed duration.
However, unlike a bank fixed deposit, the rate of return promised by a mutual fund for a FMP is not guaranteed, but is typically close to the targeted return
FMPs offer better post tax returns than bank fixed deposits (FDs)
Aha,this is by far, the best feature of FMPs. The tax benefits from investing in a Fixed maturity plan are further enhanced by the lucrative concept of indexation , especially if the FMP is for a period of greater than 1 year.
This demonstrative table offers a good example why FMPs are so much more tax efficient than bank fixed deposits
FMP Yield Tenure of FMP Indexation rate (assumed) Long term Capital Gains tax rate The benefit of indexation for a FMP investor Amount invested (assumed) (Rs) Cash receivable on maturity; total interest @ 9.30% (Rs) Indexed cost (Rs) Taxable income (Rs) Tax payable (Rs) Post tax return (assumed) 9.30% 370 days 5.00% 22.66% 100,000 109,513.24 105,000.00 4513.24 1022.70 8.30%
As the above table shows, even if the FMP has a small indicative yield of 9.3%, the post tax yield for the Fixed maturity plan is 8.3%. Comparatively, the post tax yield for a similar bank FD yielding pre-tax benefits of 9.3% will be yield post tax just 6.3% , at the highest tax slab
then pass the rest to you. Similarly, watch out three-month rates if you wish to invest in a three-month FMP. Your distributor knows,probably Try asking your agent. Some of the big distributors also have their broking arms and are present in the debt markets daily. They have knowledge of the prevailing yields (of instruments in which your FMP would invest), says Murthy. Many of these arms have sophisticated computers installed, such as those provided from Bloomberg and Reuters at their offices that provide data that help them in their research. However, many fund houses discreetly claim that they quietly inform distributors about indicative yields. Distributors, in turn, would whisper in the customers ears. Says a research analyst with one of the top online distributors, who refused to be named: When the fund houses relationship manager makes a sales pitch about an upcoming FMP launch to agents, he typically tells them the quantum of returns that investors can expect. That way it becomes easier for fund houses to convince agents that these FMPs are worth investing in. The analyst added that many fund houses prepare copious Excel spreadsheets for potential investors givingwhat is calleda simulation table of returns comparison of FMPs that provide indexation benefits vis--vis bank FDs. These are illustrative numbers, not assurances, to just give an idea. In the past year, FMP assets have risen so sharply that it cannot happen just on its own. Investors have obviously been indicated of the attractive potential returns that FMPs would be earning, says the head of sales and marketing at one of the fund houses, who did not want to be named. He said that his fund house avoids launching FMPs due to Sebis ban on indicating returns. How do I tell my investor to lock in money with us for a year when I cant even indicate what kind of returns s/he will get? Besides, FMPs are non-remunerative and fund houses earn a pittance. Its not worth it, he says. Past performance cant be relied on Avoid looking at past performance when investing in an FMP. Debt funds are not like wellmanaged equity funds that perform well in the long run despite short-term blips. Also, FMPs lock your money at prevailing rates. For instance, the one-year CD rate as on 1 June was 10.07%. Assuming your fund would have invested in itand charged about 0.50% as expense ratioyou would have earned about 9.57%. On 20 July, the one-year CD rate dropped to 9.49%; the same fund would earn about 8.99% (9.49 less 0.50) had it been launched during this time. Retail investors will need to do some homework before investing in FMPs. But its not nuclear science; its manageable, says Shobit Gupta, head (fixed income), Principal PNB Asset Management Co. Ltd. Further, once an FMP closes down or gets rolled over (an FMP that has matured returns the money to investors who seek redemption, seek fresh money and reinvests that and existing funds back into the debt markets), the past track record gets erased from public records.
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ndi l nds l ndscape|Are FMP MF debt POs a good place to invest in ndia today?
T t M t it T l ti l t i i M M t l t it l i : l t l M t l t i ti t t t H i t FMP Mutual Funds i t M t l i i i t l i l Hi it i
SEB s actions regarding ndia FMP Mutual Funds have been ambivalent
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li it t M t l H t tt i it l i M M t l l t l tt t t li i it t M T i ll t SEB SEB t t i l ti Indi t l nds. One of t e SEB proposals suggested t at Fi ed Maturit Plans in t e future should not have an option of allowing withdrawls premature to the tenure of the FMP. This SEB move regarding India FMP Mutual Funds was a controversial step that seemed to focus on supporting the Mutual Fund Houses that were not doing a good job o handling the f Fi ed Maturit Plan Fund portfolios rather than supporting the cause of investors in these FMP Mutual Funds As a sop to investors in India based FMP Mutual Funds, SEBI has regulated compulsory listing of all close-ended debt funds such as Fi ed Maturity Plans in stock exchanges. While, in principle, SEBI s move regarding compulsory listing of close ended funds such as FMP Mutual Fund Schemes seems to be a good idea, the expected absence of trading of these FMP debt securities makes SEBIs intentions unviable. SEB
So, what is the future of ndia based FMP mutual funds ? FMP vs FDs again
One has to put the current problems of FMP funds in perspective to the success of Indian FMP Mutual Funds and the current situation in the equity market. Given the current popularity of bank FDs and debt options, one really cannot deny the inherent tax benefits of FMP mutual funds in India even compared to FDs. Given the tax benefits of India FMP mutual funds compared to FDs, some investors in India will always prefer FMP mutual funds to bank Fixed deposits. Also, given the current equity market recession,the debt based FMP mutual funds vs equity funds comparison may favor Fixed Maturity Plans for some HNI investors.
SEBI s regulatory focus on India FMP mutual funds may encourage investors in Fixed Maturity Plans
SEBIs recent involvement with regulations regarding India FMP mutual funds may actually suggest to investors that close ended funds such as FMP Mutual Funds are being seriously monitored by SEBI. Also, SEBIs actions to insist on transparency in FMP Mutual Fund portfolios is a step in the right direction and will mollify investors in fixed maturity plans and suggest that FMP investments are quite safe