Fixed Maturity Plans (FMP) suddenly become popular during this time of the year (month of March) when the AMC (the mutual funds firms) launch a bevy of such schemes during this time. FMPs are better than Fixed Deposits (FD) in terms of returns and tax aspects. How? There are a lot of reasons to it. There are a lot of information there in the WWW to tell us this. The following write up on FMP is sourced from www.assettreat.com. Here it goes....
The primary objective of a FMP is to generate income while protecting the capital by investing in a portfolio of debt and money market securities. The tenure can be of different maturities, ranging from one month to five years.
FMPs can be compared to fixed deposits of a bank. While a fixed deposit offers a 'guaranteed' return, returns in FMPs are only 'indicative'. Typically, the fund house fixes a 'target amount' for a scheme, which it ties up informally with borrowers before the scheme opens. That way it knows the interest rate it will earn on its investments, providing the 'indicative return' to investors.
With the recent equity market volatility and rising inerest rate, it is time to think to have an appropriate balance between equity and fixed income instruments inline with one’s risk profile and time horizon of the need.
Benefits of FMPs
FMPs offer many benefits like tax efficiency, fixed tenure and low sensitivity to interest rates. The minimum investment amount is usually Rs 5,000, which a retail investor can easily invest.
Capital protection: FMPs have less risk of capital loss than equity funds due to their investment in debt and money market instruments.
Low interest rate sensitivity: As the securities are held till maturity, FMPs are not affected by interest rate volatility. The actual returns are more or less close to the indicative returns declared at the scheme's launch
Lower cost: FMPs involve minimum expenditure on fund management, as there is no requirement for a time-to-time review by fund managers to buy/sell the instruments constituting the fund. Since these instruments are held till maturity, there is a cost saving in respect of buying and selling of instruments
Tax benefits: FMPs score over fixed deposits because of their tax efficiencies both in the short-term as well in the long-term.
Short-term tax advantage – Dividend option
Mutual fund dividends are tax-free in the hands of the investor (subject to a dividend distribution tax @14.03% for retail investors and 22.44% for corporate investments), whereas the interest on a bank deposit (except where special 80C approved) is added to the income of the investor and taxed as per his/her slab.
Long-term tax advantage – Growth option
Long-term capital gains (investment of more than a year) enjoy indexation benefit. So if the investment is for more than a year, in the growth option one has to pay long-term capital gains tax of 20% with indexation, or 10% without indexation on debt products.
Double indexation Benefit
FMPs investors can get 'double indexation' benefit, which is not available in case of fixed deposits and bonds. This advantage can be availed by investing in an FMP just prior to the end of a financial year and withdrawing it after the end of the next financial year. An investor can invest in an FMP before March 31 and withdraw it after April 1 the next year.
Thus, the amount remains invested for a period slightly greater than a year. This ensures the applicability of indexation benefits for inflationary changes in two years, which can help investors, reduce the tax.
Double indexation, in some cases, can even lead to a net loss figure, even though there is a profit, and thus expunges the tax obligation of the investors.
The taxable amount is calculated using the following formula:
Taxable Gains = Amount Returned – (Amount Invested x Inflation Index for Redemption Year/ Inflation Index for Investment Year)
Illustration of Double Indexation benefits:
Illustration of Double Indexation benefits:
|
Bank FD | FMP - Growth Option | FMP - Dividend Option |
| With Double Indexation | Without Indexation |
| Amount of Investment (Rs.) | Rs.10,000/- | Rs.10,000/- | Rs.10,000/- | Rs.10,000/- |
| Assumed Return (annualised)* | 7.50% | 7.50% | 7.50% | 7.50% |
| Tenor (in days)** | 400 | 400 | 400 | 400 |
| Maturity Amount (Rs) | 10,822 | 10,822 | 10,822 | 10,000 |
| Gross Dividend (Rs) | - | - | - | - |
| Gross Gain (Rs) | 822 | 822 | 822 | 822 |
| Indexed Cost (Rs) | NA | 11,470 | NIL | NIL |
| Indexed Long Term Capital Gain / (Loss) (Rs) | NA | -648 | NA | NA |
| Tax Rate | 30.90% | 20.60% | 10.30% | 14.1625% |
| Tax (Rs) | 254 | Nil | 85 | 102 |
| Post Tax Gain (Rs) | 568 | 822 | 737 | 720 |
| Post Tax Annualised Return | 5.18% | 7.50% | 6.73% | 6.57% |
