FAQ on Fixed Maturity Plan
What is Fixed Maturity plan?
FMPs are debt schemes, where the corpus is invested in fixed-income securities. The tenure can be of different maturities, from one month to three years. More formally, these funds are Closed Ended debt oriented mutual fund schemes with a defined maturity profile.
Why the risk in FMPs is low?
There are two types of risk involved 1) Credit Risk 2) Interest Rate Risk. Credit Risk : As the investment is only done in carefully selected AAA and AA debt securities the risk is very low and diversified. Hence the credit risk is very low. Interest Rate Risk : Is the risk arising because of the selling of the debt securities before its maturity period. In the FMP the investment in the debt security is done for the same period as the maturity of the FMP. Holding the underlying instruments up to their maturity effectively mitigates the interest rate risk as there is no buying and selling of the instrument is needed. Hence the risk in the FMPs is very low.
Why FMP is important in current scenario?
In recent past interest rates steady hiked due to higher inflation. Interest rates are near their peak levels in this cycle as RBI's measures to hike interest rates and tighten liquidity are likely to slow down credit growth and bring down inflation. Thus, we feel that investors should start locking into 1-3 year FTP at the current levels depending upon the liquidity constraints and thereby avoid any opportunity loss or reinvestment risk in the event of interest rates declining in the future. However, returns are not fixed though more or less certain.
What is the tax liability on FMPs?
An FMP is an income scheme of a Mutual Fund. Hence, the tax incidence would be similar to that on traditional income schemes. The dividend from an FMP will be tax free in the hands of an individual investor. However, it would be subject to the dividend distribution tax (14.1625% for individual and 22.66% for non-individual). Redemptions from investments held for less than a year will be short-term gains and added to the investor's income to be taxed at slab rates applicable. If such an investment is held for more than a year, the long-term gains will get taxed at 20% with indexation (surcharge and education cess extra) or at 10% (surcharge and education cess extra) without indexation.
How FMPs are better than Fixed Deposits?
Fixed deposit are the closest and the most traditional investment avenue when it comes to comparison with FMPs. Though as FMPs are mutual fund schemes, they cannot assure guaranteed returns, they do provide an indicative return. FMPs will provide higher transparency and liquidity compare to Bank FD. Please find enclosed some illustration of the available FMPs and its comparison with Fixed Deposits
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HSBC 3 Year FTS ( Series 30)
(Indicative Yield 9.5% CAGR)
Comparison of 3 year FMP – Growth Option Vs Fixed Deposit
HSBC Fixed Term Series 30 Growth Option Invested Amount Net Yield – Pre Tax CAGR Redemption Amount Capital Gain / Interest amount (Rs.) Indexed Cost* Indexed Gain LTCG Tax Rate / tax on Interest LTCG Tax / Tax on Interest (Rs.) Post Tax Gain (Rs.) Post Tax Yield ( CAGR) Loss in Bank FD against FMP (Rs.) * Cost inflation index assumed at 5% 100,000 9.50% 131,293 31,293 115,763 15,531 22.66% 3,519 27,774 8.51% Fixed Deposit Individuals with Individuals with Income<10 Lacs Income>10 Lacs 100,000 8.25% 126,848 26,848 30.90% 8,296 18,552 5.84% -9,222 100,000 8.25% 126,848 26,848 33.99% 9,126 17,722 5.59% -10,052 Non Individuals 100,000 8.25% 126,848 26,848 33.99% 9,126 17,722 5.59% -10,052
Key Features
NFO closing date Minimum Investment May 25, 2007 Rs. 10,000 for Regular option Rs 1 Crore for Institutional option Options Dividend Frequency Entry Load Exit Load Credit Quality of the portfolio Interest Rate Risk High Liquidity Growth & Dividend Half yearly* Nil 2% till Maturity G-Sec, AAA/AA securities & Money Market Instruments Nil Repurchase facility available on all business days
Half yearly subject to approval of trustees and availability of distributable surplus.
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(FOR ADVISOR ONLY)
SUNDARAM BNP 30 Months FMP ( Series XIII)
(Indicative Yield 10.10% Annualised)
Comparison of 30 Months FMP – Growth Option Vs Fixed Deposit Sundaram BNP Paribas FTP Growth Option Invested Amount Net Yield - Pre Tax Annualised Redemption Amount Capital Gain / Interest amount (Rs.) LTCG Tax Rate / tax on Interest LTCG Tax / Tax on Interest (Rs.) Post Tax Gain (Rs.) Post Tax Yield ( CAGR) Loss in FD against FMP (Rs.) + Long Term Capital Gain Tax assumed at 11.33% 100,000 10.10% 125,250 25,250 11.33% 2,861 22,389 8.42% Fixed Deposit Individuals with Individuals with Income<10 Lacs Income>10 Lacs 100,000 8.80% 121,919 21,919 30.90% 6,773 15,146 5.80% -7,243 100,000 8.80% 121,919 21,919 33.99% 7,450 14,468 5.55% -7,921 Non Individuals 100,000 8.80% 121,919 21,919 33.99% 7,450 14,468 5.55% -7,921
Key Features
NFO closing date Minimum Investment Options Entry Load May 16, 2007 Rs. 5,000 and in multiples of Re.1/- thereafter Growth & Dividend Nil 3.50% on 180th day from the date of allotment Exit Load 3.00% on 360th day from the date of allotment 2.50% on 540th day from the date of allotment 1.50% on 720th day from the date of allotment Credit Quality of the portfolio Interest Rate Risk High Liquidity AAA/AA securities & Money Market Instruments Nil Repurchase facility available on all business days (FOR ADVISOR ONLY)
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SUNDARAM BNP 18 Months FMP (Series XII)
(Indicative Yield 10.00% Annualised)
Comparison of 18 Months FMP – Growth Option Vs Fixed Deposit
Sundaram BNP Paribas FTP Growth Option Invested Amount Net Yield – Pre Tax Annualised Redemption Amount Capital Gain / Interest amount (Rs.) LTCG Tax Rate / tax on Interest LTCG Tax / Tax on Interest (Rs.) Post Tax Gain (Rs.) Post Tax Yield ( CAGR) Loss in FD against FMP (Rs.) + Long Term Capital Gain Tax assumed at 11.33% 100,000 10.00% 115,000 15,000 11.33% 1,700 13,301 8.68% Fixed Deposit Individuals with Individuals with Income<10 Lacs Income>10 Lacs 100,000 8.42% 112,627 12,627 30.90% 3,902 8,725 5.74% -4,575 100,000 8.42% 112,627 12,627 33.99% 4,292 8,335 5.48% -4,966 Non Individuals 100,000 8.42% 112,627 12,627 33.99% 4,292 8,335 5.48% -4,966
Key Features
NFO closing date Minimum Investment Options Entry Load Exit Load May 16, 2007 Rs. 5,000 and in multiples of Re.1/- thereafter Growth & Dividend Nil 2.50% on 180th day from the date of allotment 1.50% on 360th day from the date of allotment Credit Quality of the portfolio Interest Rate Risk High Liquidity AAA/AA securities & Money Market Instruments Nil Repurchase facility available on all business days (FOR ADVISOR ONLY)
Drashti Investments Drashti.Investments@rediffmail.com