Insights on FMP and its Perks ~ CEDRUS WEALTH PARTNERS

FMP, a close-ended debt fund that invests for a specific period of time and has low risk.

Traditional approaches of Investors keen on debt exposure in their portfolio tend to be inclined towards well-known debt instruments like Bank FDs (Fixed Deposits), Bonds, NSC (National Savings certificates), Post Office, etc. Although they are popular choices, the fact that they are not the most tax –efficient investment avenues isn’t that well known. Except PPF and PF, all the income from these sources are fully taxable rendering the current rate of inflation to be higher than the real return. What isn’t common knowledge is that the priority that must be given to Fixed Maturity Plan as a debt instrument for better results.

What is an FMP?

Fixed Maturity Plan, widely known as FMP, is a close ended debt mutual fund. This fund can be used to invest in instruments whose duration is similar to its own term as it aligns its term with that of its underlying assets. For example, an 1115-Day FMP would invest in instruments that mature in 1115 days or slightly before that.

This approach of FMP eradicates the factor of risk due to interest rate fluctuation which is common in debt funds. This scheme is highly favorable for investors seeking stable returns from a debt investment.

Perks to an investor

The FY-15 union budget has changed the taxation rules for non-equity mutual funds like FMPs. Accordingly, short-term capital gains (one and two-year FMPs) will be taxed at 30% (assuming the investor falls into the highest tax bracket).

What is in it for the investor?

Investments that are held for 36 months or more provide an ideal investment avenue for FMPs due minimum market exposure to risk
Protection of capital
Long-term parking of funds
Better returns due to the indexation benefit of
Facilitates steady growth and return on investment

What does an FMP Portfolio comprise of?

1	Non-Convertible Debentures(NCDs)
2	Government Bonds
3	Highly rated securities like AAA rated Corporate Bonds
4	Treasury Bills (T-bills)
5	Commercial Papers(CPs)
6	Certificates of Deposit (CDs)
7	Bank FDs and other money market instruments

How does an FMP return look vis-à-vis a Bank FD return?

The table aside illustrates returns of a fixed deposit and FMP for a term of 3 with the assumption that the investment was done in the financial year of 2011-2012. FMP investments and the perk of indexation are available for those who invest for a long period of time. 3-year FMPs have a significant tax advantage over fixed deposits

Things to consider before selecting an FMP

Being knowledgeable and informative about where the FMP is being invested is immensely important as the creditworthiness of the fund’s assets is directly dependent on the quality of the portfolio.

The Scheme Information Document (SID) provides the past record for the FMPs of the fund house which can be referred to and studied to check its past performance which can give additional information regarding the capabilities of the fund manager.

Do FMPs have any drawback?

Redemption

FMPs cannot be easily redeemed before the maturity of the final date for redemption

Sales

All FMPs are mandatorily listed in stock exchange. So if the person wishes to redeem before its maturity period, he can sell them on the stock exchange.

Liquidity

As trading of units listed in the stock exchange isn’t frequent, it can make the FMPs liquidated at the time of need.
Although, one is provided with the option of availing a loan against FMPs with 100 bps differential and 10% margin.

To summarize, the drawbacks of this fund come into picture when the funds invested are to be withdrawn earlier than planned and taking this into consideration, it is safe to presume that the perks overweigh the cons.

The ideal nature of FMP’s makes it the perfect choice consisting of tax benefits and profitable returns for investors. The investment that is made will decide the taxation applicable to it which can either be dividend or growth.

Cedrus Wealth Partners understand the difficulty of clients finding professional financial advice and aims to assist in a resourceful and reliable manner. We help you make better decisions with proper guidance regarding your finances increasing the credibility and efficiency of your investments.