Why Fixed Maturity Plans are better than Fixed Deposits?

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%

 

Make hay while the gold shines!!!

Being an Indian, the fondness for gold is natural in me. But the reasons a Indian likes gold is different (mostly) from the reason a citizen of any other country in the world likes it for. We like the gold more for its aesthetic value than its monetary value. But this is not what I am going to talk about in this posting. This blog post will deal more with gold as an investment option for the common Indian. Times have changed and gone are those days when gold was just bought for jewelery related needs. Today the common Indian is looking at gold as an alternative investment option. The curiosity has increased more so, since RBI purchased 200 tons of gold to hedge its FOREX reserved against currency volatility. If RBI is doing it, why not us? But how do I invest in gold. What are the different options available for me in this domain? Let me try to answer these questions in a more elaborate manner.

The different avenues of investing in gold are as follows:

1. Gold jewelery
   This has been the traditional mode of buying (I don't say this as an investment) gold. If you are looking for investment this is not the approach you should take. Ornament gold is not pure and is usually mixed with copper for stability in jewelery making. The purchasing cost would involve designing & making charges, VAT, and what not :) You are least interested in spending on the sundry charges if your motive is gold investment. Avoid this option for gold investment.
   
2. Gold bars/coins
   Nowadays you can walk into any bank in you area and can buy yourself a gold coin/bar from them. You don't have to wait for Akshaya Thrithaya to see the advertisements in banks. The yellow metal gets sold through out the year and you just need to inquire about it. Its not just banks but the list includes jewelers and other NBFCs as well. You can be assured of the purity of the gold sold in banks and the banks earn the money the same way they earn money in currency dealings. They just take advantage of the fluctuations and also rely on the hunch you may end up opening a locker and hence a FD with them as well. In this option, though you can be assured of the gold quality, you sure would have issues in maintaining lockers and even the subsequent liquidation of the solid gold bars/coins. Go for this option only if you have sure plan on how to safe store and liquidate the items.
   
3. Gold futures
   They operate more or less in the same way futures operate in stock markets. They are just commodity based futures and I would not go more deeply into this option for 2 reasons - 1. Don't know much about this option 2. Usually futures are dealt by people who are sure about the value flows of the underlying commodity.
   
4. Gold ETFs
   Benchmark mutual fund launched country's first Gold ETF and it was an instant hit. ETF - Exchange Traded Funds are just like stocks that you can trade in the stock market. ETFs benchmark the actual gold value and hence more or less track the physical gold's value in the open market. Advantages include facility to buy at the least granularity, 1 ETF unit = 1 gm of gold and hence conducive to minimum periodic buying, low maintenance cost, no hassles of storing gold in lockers etc Disadvantage, if any, would be to have a demat account for yourself. Demat penetration in India is still very low. Again since 1 ETF unit = 1gm of gold, and there are a lot of ETF options available in the market - BeES, Reliance, Kotak etc, which one should I buy? Go for the ETF which has the maximum liquidity and minimum tracking error in the market and we have only one answer and that is Benchmark Gold BEes.
   
5. E-Gold
   E-Gold belongs to the E-Series dealings of the Nation Spot Exchange Ltd (NSEL). E-Series is an option for the investor to buy/sell gold in demat form. You need to have a beneficiary demat a/c with NSEL to trade in the E-Series. Apparently, E-Gold has given better returns than any other form of gold investment according to this ARTICLE in Business-Standard. Options of re-converting e-series contracts to physical gold (with 100% quality) is also available. Obvious disadavantage is the separate demat a/c. But this seems to be a very good option for an options trader and someone who can be involved in disciplined investment.
   
6. Gold funds
   There are not many gold based funds in the market. I can only think 2 of them right now. Can-Robeccco-INDIGO and the recent NFO Reliance gold savings fund. There is a a difference between the 2 funds and addresses 2 different kinds of investors. Can-Robecco INDIGO is for the investor kind who wants to be conservative with gold exposure. INDIGO fund will invest a maximum of 35% of its funds in various gold-ETFs and the rest in safe debt funds. The other fund is the ongoing NFO Reliance Gold Savings Fund (RGSF). This fund is for people who want an aggresive gold exposure, since RGSF can have a maximum of 100% in gold-ETF (and just Reliance gold ETF). This is more of a ploy by Reliance Mutual to improve the RGETFs trading volumes and also an intelligent way of luring investors without demat a/c to invest in gold.
   There is one more group like the AIG World Gold Fund, Quantum gold fund etc. These funds invest in gold mining companies all over the world and is only for aggressive investors.
   The advantage with gold funds are that they allow SIP options that is not available in any other form of gold investment as of now. But otherwise there are obvious disadvantages here with double taxing and double loads of the fund and the underlying schemes here.
   If you have a demat account then buy your G-ETF directly and dont go for this option.
   

What is my recommended investment strategy?
My vote would be to go for a systematic/disciplined long term plan in gold. Gold ETFs and E-Gold look interesting. Gold funds offer benefits of SIP option that is not currently available with ETFs and E-Gold. Three different options based on your liking and in my preferred order.

• If you can be disciplined with your investment schedule, then go for a systematic disciplined investment monthly in E-gold or Gold-ETF (based on what you are comfortable).
  
• A multi-year SIP on RGSF, if you prefer automated investment.
  
• Invest in AIG World Gold Fund and Can-Robecco-INDIGO in a 50:50 ratio. This is a good mix of aggressive and safe funds.

Remember the most important thing. Any gold investment should span atleast 3-5 years and every year the investment should be distributed through out the year (like in SIP) before some good profits can be achieved.

Some gold trivia!!!
Do you know European countries (even tiny ones) hold gigantic gold reserves? Popular theory tell us that these gold were looted during the colonial era. Click here to find out which are the countries with the maximum gold reserves.

Happy Investing!!! And may your life shine like gold!!!