Fixed Maturity Plan (FMP) is fixed tenure, debt-based scheme, which terminate on a pre-determined date. FMPs are ideal for those investors who wish to park their funds for a specific period.
The return of these schemes are predictable as money is invested in fixed interest based securities maturing in the line with the maturity of the underline FMP.Must Read KISS strategy in Financial Products: Keep It Simple Stupid What is Insurance – Investment or Expense
The portfolio comprises of bonds, which normally mature in line with the defined period of the FMP and are passively managed with an eye on interest income rather than the trading profits.
Tenure: FMPs are available for as short as 1 Month to even more than 5 years.
How an FMP is better than Fixed Deposit ( FD)?
The major difference is the post tax returns of these instruments. Interest on Bank FDs is fully taxable u/s 56 and gets taxed at the highest rate at which the individual/assessee pays tax whereas the return from FMPs is either subject to the Dividend Distribution Tax (for the dividend option) or the capital gains tax rate (for the growth option). The Distribution Tax rate is @14.16% and the capital gains tax rate is @10% (or 20% with indexation). These taxation rates are lower than the income tax rate applicable on Fixed Deposits, especially in the case of investors in the higher tax bracket. Tax directly eats into returns, which is why FMPs have the edge over Bank FDs. Also for longer tenure FMPs the indexation benefit is allowed.
Take an example of a 13-month(1 year & 1 Month) FMP which, if launched now, will mature in April 2011. It will pass through two financial years – launch in 2009-2010 and maturing in 2011-2012. Thus, it can have a benefit of double cost indexation for the purpose of calculating its cost of purchase (post-tax yield). Look at the workings: Note: Cost Inflation Index for FY09-10 is 632. The assumption is that the CII for FY11-12 will be 697. * Approx CII growth @ 5% (It depends on inflations figures). Clearly, the post-tax return is superior for an FMP.
Investment Amount (Rs.)
Assumed Net Yield to investor (p.a)
Amount at Maturity (Rs.)
Interest/Long Term Capital Gain
Indexed Cost of Acquisition
Indexed Gain/ (Loss)
Tax Rate ^
Tax on Interest on FD/ Capital Gain on MF
Post Tax Income
Post Tax Rate(Simple Annualised)
^ Assumed to be in the highest tax
Benefit of investing in FMP in March: Say if you are investing for 13 Months in March you can use Double Indexation Benefit but if you are investing in April you will only be able to use single Indexation. This is applicable to all maturities over one year. Investing in March will bring your tax liability very low & net tax free returns very high.
New Direct Tax Code: It’s expected from 1st April 2011. According to this there will be changes in calculation of Indexation. Before investing, please consult us or your tax-planner on this aspect.Also Read Understanding the difference between Income & Wealth Returns cannot be your goals in investing
How an FMP, different from a debt fund?
Investment in FMP is insulated from interest rate volatility unlike a normal debt fund. The bonds comprising the portfolio of an FMP is held till maturity and hence investors of the aforesaid plan earn the normal yield applicable without getting affected by any midway price fluctuations arising out of interest rate fluctuations.
What are the benefits of an FMP?
1) Minimal Risk: Debt funds, are exposed to three kinds of risks viz. interest rate risk, credit risk and liquidity risk. FMPs are designed to effectively minimize and in some case eliminate these risks.
Interest Rate Risk: FMPs are least exposed to interest rate risk as the fund manager holds the instruments till maturity getting a fixed rate of return like a normal FD.
Credit Risk: FMPs primarily invest in AAA or P1+ rated instruments with a short-term maturity profile from 3 months to 36 months and thus there are very low/ no credit risks.
Liquidity Risk: High credit quality automatically ensures high liquidity too.
This effectively means that investors can protect themselves from any capital loss on maturity.
2) Low Expenses: FMPs because of their very nature of holding the instrument till maturity, FMPs minimises expenses. Unlike a bond fund, there is no redemption pressure and as there is also no regular churning of the portfolio, this reduces costs incurred in buying these instruments and the fund managers cost of reviewing the portfolio on a regular basis.
3) Liquidity: Although FMP is best if held till maturity, but investors have an option to exit at any point as all FMPs are traded.
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