FMPS ARE THE LATEST FLAVOUR OF INVESTMENT

FMPS ARE THE LATEST FLAVOUR IN THE INVESTMENT HORIZON


Once John M. Keynes famously said, in the long run we are all dead. So to make money in short term perhaps came FMP. In India the mutual funds started fixed maturity plans, as early as 2005 on a regular basis. At that time FMP were the darling of corporate houses and high net worth persons only. But in 2008, as interest rate went up & equity crashed the most of the mutual fund houses started offering fixed maturity plans in various period of maturity for common investors too. Investors who flocked to gold as the 'safe asset' were disappointed at the way the price dropped in August. Real estate rates too have dropped. People got attracted to FMP. Seeing the increased interest of large section of population more and more FMP s are on offer at present. Now, question has been asked as to how safe the FMP is?

The FMP s is generally a safer instrument. But as the mutual fund cannot guarantee the returns like bank fixed deposit, it only “indicates” the returns. The pre tax returns are similar or slightly higher than the bank fixed deposit. But post tax return is much higher compared to FD of bank due to tax treatment. Generally the FMP s is closed ended fund. Generally you cannot exit till the maturity of the plan. However there is a provision. But the exit load is high enough
Presently, the only asset that beckons is debt with interest rates rising. But would it make sense for an investor to move into debt? While this is a good time to reassess one's portfolio, it would not be wise to simply rush to income funds, Fixed Maturity Plans (FMP s) or fixed deposits.
Why people invest in FMP now days? Investors find FMP more tax efficient. In dividend mode it does not attract any tax in the hands of investors. (However dividend distribution tax of 14.5% is charged). If the plan is for more than a year long term capital gains tax is only imposed which is much lower than the regular income tax of 33%. Of late it is seen that some of the Mutual Fund Houses have offered 11.50% “indicative returns” for a period of three years. This kind of returns was unheard of before. It is observed that large numbers of taxpayers are lining up to subscribe to such plan.
It may not be very effective for non income tax payers. If any senior citizen’s yearly income is less than Rs.two lakh twenty thousand he or she would not be really benefited by subscribing to fixed maturity plan. The FMP attracts capital gains tax and dividend distribution tax. So FMP s would not be cost effective for non income tax payers. Widows, single mothers and senior citizen who do not pay income tax should continue to subscribe to bank’s FD. That would be much more beneficial to them. Whether FMP s is totally safe instruments? Generally it is safe but sometime bad realization of bond purchased by fund may disturb the apple cart. The FMP generally invests in high quality triple xxx papers rated by two credit rating agencies. Yet there can be slip between cups and the leaps. Up till now no such incidents have been reported. Yet there are talks in the air, after sub prime situation, that incase some mutual fund depended on the papers of non-liquid sector a possibility exist for delay in payments! In theory you can loose your money in FMP but in real practice you get back the money you are indicated at the time of subscription to the FMP. The FMP generally offers tenures of one month to 420 days. (ICICI’s three years tenure is an exception, offering 11.5% indicative return.) We recommend that persons who have trust in the system of mutual fund may subscribe to the fixed maturity plan after due diligence. If you are an Income tax payer, a high net worth person and need good return, in short term, may subscribe to FMP. But one thing must be kept in mind that in October,08, Warren Buffet is buying equity for he felt in the long term equity is the King. Of course you need Lion’s GUT to jump into equity now!

--------------------------------------------