FMPS OR BANK FD ARE EFFICENT WEALTH CREATOR ?

Since equity plans not doing very well over the last years people are seeking alternative avenues for investment now. Most people are investing their money in Fixed deposits of Banks and in Fixed Maturity Plans. In investment horizon there are many plans to invest our money in the market.. There are equity fund, index funds, debt fund, ELSS and fixed maturity funds beside fixed deposit of Banks. Among all the funds fixed maturity funds are less risky. One thing must be kept in mind that fixed maturity funds are not risk proof as generally made out to be.. It however is next best to the fixed deposit in bank, PPF, SCSS etc as far as security of money is concerned. Fixed Maturity Plan protects capital but is open to interest rate risk. It provides better return most of the time than fixed deposit. This fund is popularly known as “FMP”

The reason investors choose FMPs is for their high returns which are also indicated but not guaranteed. In order to give assured returns, FMPs opt for very secure investment options like AAA rated corporate bonds whose maturity tenure matches the maturity tenure of FMP. However in the recent times, some of these FMPs started investing in commercial paper from real estate and finance companies, in order to give higher returns on their investors. The long term FMPs become more tax efficient as it does not attract income tax due to double indexation.

The investing in FMPs allows an investor to earn higher returns while minimizing their exposure to the risk. As a result, many fund houses have introduced their FMPs to entice investors to invest with them. But what are FMPs? Are they safe as they seem to be? If not, what are their pitfalls? We explained in the beginning of the article about the myth surrounding the FMPS. It is not always safe like Bank FDAs the name implies; these plans have a certain maturity period. They are closed-ended funds, meaning you can invest in them only when they are open for purchase. This is only during NFO period. To redeem your investment, you need to wait for the pan to mature or pay a stiff 2% exit load. Generally FMPS are for around 13 to 18th month’s period. Incase you can survive the period a handsome gain could be expected. If you take out during midstream you loose money as there is high exit load.



How FMPS could provide better return than bank F. D.? In order to give assured returns, FMPs opt for very secure investment options like AAA rated corporate bonds whose maturity tenure matches the maturity tenure of FMP It is however a myth that there is no risk in FMP. Despite their claims of being one of the safest investment options around, FMPs do have their own share of risks. A few of them are as under:

Those FMPs offering higher yield can afford to do so by investing in risky investment options. This has been evident in 2008, when these funds faced liquidity crisis due to their exposure to real estate and finance companies. . In the recent times, some of the FMPs started investing in commercial paper from real estate and finance companies, in order to give higher returns to their investors. When the finance and realty companies landed in trouble during the recent economic downturn, their offerings also lost value Investors pulled out in panic. With the investors pulling out their investments from these FMPS, the funds were forced to offload their investments in the illiquid markets, thereby causing liquidity crisis. But ultimately investors who stayed invested did not loose at the end of the period and go almost assured returns. The actual yield will depend on the yield on the debt instruments at the time of actually investing your money. In reality the FMPs offer safety of their capital, but they do not offer protection against interest rate risk. As the interest rate rises, the value of the bonds goes down. This sometime can affect the returns of the fund.

What precaution investors should take while opting for FMPS. To get the best out of FMP certain precaution should be taken. Always check the indicative portfolio of the funds. In case you find any non AAA security avoid the particular FMPs. The assured yields are on the indicative yield as the actual return indicative and suggestive and should not confuse with guarantee. Sometime there are wide gap between yield shown while launching and actual yield at the time maturity. Sometime it is more but sometime it can lower.

The golden rule is to stick to the maturity period of the plan. Don’t withdraw half way through as it will force the fund manager to redeem investments at any available price, thereby causing losses to you as well as other investors. The FMPs are good investment for risk adverse people of middle age group. But do not put all the eggs in one basket. You can invest 10% of the total investment in fixed maturity plan and earn better returning compared with the Fixed Deposit of Bank. But for persons who don't come under income tax ambit fixed deposit of bank at the rate of 10.5% are more paying than FMP now. It would be for individual persons to choose what suits them best.

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