The recent turmoil in the debt market has shown that it is not just the equity markets that require portfolio review. While not much changes for long-term wealth builders and those who hold debt funds as part of their long-term asset allocation, investors taking tactical calls will do well to keep their eyes open – both for risks and opportunities.
For an investor spooked by the debt market, low-risk opportunities such as Fixed maturity Plans (FMP) could prove to be good choices now.
A number of fund houses have launched fixed maturity plans (FMP) to make the best of the high yields prevalent in the debt market today. What exactly are FMPs and when should one invest in them?
FMPs are close-ended debt schemes with a fixed maturity horizon. That means they are open for investment for a few days during launch and then closed until maturity, which may be just a month away or as long as five years.
FMPs invest in money market instruments, bonds and government securities. Their fixed tenure often makes them comparable to fixed deposits.
However, unlike fixed deposits, FMPs do not guarantee returns. Still, they are considered low risk, especially when compared with open-end debt funds, for a few reasons.
First, FMPs choose instruments in such a way that the tenure of the underlying investment coincides with that of the FMP. For instance a 1-year FMP will invest in debt instruments that also have the same maturity.
By doing so, the fund will ensure that it gets the interest income (called accrual) on these instruments when the FMP matures. This strategy ensures that returns are positive if held to maturity, unlike open-end funds that may slip in to negative returns once a while.
This way, the investments are not affected by the varying prices of the instruments in the debt market, till they
mature.
Two, as FMPs are locked in (although they have an exit option through the stock exchange route, they are thinly traded and hence, not liquid), it does not face pressure of redemption and hence, it does have to churn its portfolio to meet exits. This also provides stability to FMPs.
Tax efficient
On the return front too, FMPs held for over one year can deliver superior post-tax returns, when compared with fixed deposits, as a result of indexation benefit. Unlike fixed deposits, FMPs (and all debt funds) enjoy capital gain indexation benefit if held for more than a year. Interest on fixed deposits, on the other hand, will be taxed at your regular income slab rate.
Although the dividends are taxed at the fund’s end at 28.32% (as dividend distribution tax), the growth option in an FMP provides leeway to index cost and, sometimes, enjoy nil capital gains tax in periods of high inflation (as the indexation will be done in line with inflation).
The way FMPs are structured also makes the indexation benefit more attractive. Often times during the end of a financial year, the tenure of an FMP would be a year and a few days or 2-3 years and a few days. For example, an FMP launched in end March 2013 for 380 days will mature in April 2014. But for indexation the investment will be considered to be made for 2 years – that is from FY 2012-13 to FY 2014-15, thus providing higher indexation of cost.
You may note that FMPs of less than one year will be taxed at your income tax rate. Hence, if you are in the high tax bracket, short-term FMPs may not make for great post-tax products for you.
Is it a good time to invest?
FMPs suffer from one key limitation – reinvestment risk. This limitation is true of deposits as well. Reinvestment risk is nothing but the possibility of not getting the same returns in other investment avenues after the FMP matures. This is where open-end debt funds score over FMPs as the former can be held as long as one needs to.
FMPs are ideal if you believe you do not need the money for a fixed term and actually have a goal for that investment at the end of the tenure. For instance, if you have plan to buy a car a year down the line and wish to save some money for down payment, a 1-year FMP can be a good option.
You should also know at what point in a rate cycle FMPs will fit you best. Typically, FMPs can be good options in a rising interest rate cycle when compared with open-ended debt funds. In such a scenario, FMPs will lock into reasonably high rates but open-ended debt funds may see a temporary fall in their price as yields climb up.
Also, if an investor goes for a FMP-tenure of less than 2 years when rates are climbing, chances are, when the FMP matures,they will likely be in a falling rate territory and money can right away be invested in open-end debt funds.
Looking for returns
SEBI stopped the practice of fund houses declaring the indicative yields of FMPs. That means, you will not know the likely return that the product will deliver. Still, you may try to get an idea through other means.
The key here is to look at the nature of instruments that the FMP promises to invest into. If an investor or his/her advisor can check for the yields on such instruments at that point in time, it will give them a rough idea on what returns to expect.
The yields of the underlying instruments (such as CDs, commercial papers, bonds) at the time of offer is either mentioned in the offer document or can be checked in public websites.
For instance, 1- year FMP can fetch anywhere between 9-10 per cent currently (depending on the proportion of investment in CDs and commercial papers), as most of them seek to invest in certificates of deposits and commercial papers.
You will also do well to know if the FMP promises to invest in top-rated instruments and whether it takes any credit risk by going for instruments with mediocre credit rating.
In 2008, for instance, some FMPs had invested in debt instruments of real estate companies. With the real estate sector going into a liquidity crunch, the risk of defaulting appeared high.
Look for FMPs with about a year’s tenure over the next few weeks here. Note that FMPs are often open for a day or a couple of days and do not reopen for
investments. Hence, you will do well to keep tab of new offers, if you wish to invest.
Wealth Conversations – April 2024- Temporary suspension of subscriptions in ” Mirae Asset Global Electric & Autonomous Vehicles ETFs Fund of Fund & Mirae Asset Global X Artificial Intelligence & Technology ETF Fund of Fund
- Merger Announcement: Aditya Birla Sun Life CRISIL IBX AAA Mar 2024 Index Fund
Here is everything that you need to know about Arbitrage Funds- Temporary suspension of subscriptions in “DSP US Treasury Fund of Fund”
There is no better timing than this to lock in your returns given the current high level of yield. http://www.ddramanathan.blogspot.in
How does one to keep tab of new FMP offers of top-rated instruments of various AMC ?
Hello sir, if you are a FundsIndia investor, you willr eceive weekly mails/updates. You can also check them at http://www.fundsindia.com/content/jsp/admin/gSpcSchmLst.do?prcsMd=nfo&show=more
tks
Fundsindia provide very insightful and unbiased advise on markets and investment related products. http://www.ddramanathan.blogspot.in
I have started purchasing FMPs since September, 2013. In this connection, I have some doubts which require clarifications. Kindly clarify the issues mentioned below:-
(a) I have purchased 368 days FMP. I would like to know from which date the counting will start- from the day of my purchase, or, from the date when the FMP gets closed.
(b) After the completion of 368 days, whether the amount will be automatically deposited in my registered Bank Account, or, I have to apply at that time for redemption?
With regards,
Partha Kansabanik
New Delhi
Hello sir,
a. the date of maturity is usually from the date of closing date..in any case every fund will mention the date of maturity.
b. if you have provided your bank details, the amount will automatically be credited to your account, else you will receive a chq. You need not apply for redemption
Thanks
Vidya
Thank you for the clarifications, Madam.
What is Flexi Option in HDFC FMPs.
I have heard about Growth and Dividend options. First time I am noticing this option.
Regards
Chakra
hello sir, Under the flexi option, the surplus (that is income generated by the fund) may be retained in the NAv or distributed partly at the discretion of the scheme, before maturity. this is available for only tenure of over 366 days. This is a variant of normal dividend option, wherein the entire ditributable surplus is declared as dividend. thanks.
What is Flexi Option in HDFC FMPs.
I have heard about Growth and Dividend options. First time I am noticing this option.
Regards
Chakra
hello sir, Under the flexi option, the surplus (that is income generated by the fund) may be retained in the NAv or distributed partly at the discretion of the scheme, before maturity. this is available for only tenure of over 366 days. This is a variant of normal dividend option, wherein the entire ditributable surplus is declared as dividend. thanks.
How are short term FMPs (< 1 year) taxed for dividend and growth option?
Hi Jobby. Growth option less than 1 year: capital gain will be taxed at your regular tax slab. Dividend payouts are not taxed in your hands. But dividend distribution tax of 28.3% (DDT of 25% plus cess plus surcharge) will be paid by the fund house by deducting from NAV. Thanks.
So all gains from a FMP (growth option) of less than 1 year is capital gains when the scheme matures/closes? OR is it possible that it may be declared as a dividend even if I have chosen growth option?
Another question where can I find the indicative return/interest rate for FMPs? Do Fundsindia provide these numbers during NFO?
hello Jobby, If you choose for the dividend option, only then you will have dividends. Distributors and AMCs are barred by SEBI from providing any indicative yield rates. Hence, you need to look at the offer document and know where the funds are investing (the debt instruments in which they are investing) and have an idea on the current yields of such instruments. For instance, 1 year CDs yields are around 9% currently and 1 year CPs at 9.6%. thanks.
How are short term FMPs (< 1 year) taxed for dividend and growth option?
Hi Jobby. Growth option less than 1 year: capital gain will be taxed at your regular tax slab. Dividend payouts are not taxed in your hands. But dividend distribution tax of 28.3% (DDT of 25% plus cess plus surcharge) will be paid by the fund house by deducting from NAV. Thanks.
So all gains from a FMP (growth option) of less than 1 year is capital gains when the scheme matures/closes? OR is it possible that it may be declared as a dividend even if I have chosen growth option?
Another question where can I find the indicative return/interest rate for FMPs? Do Fundsindia provide these numbers during NFO?
hello Jobby, If you choose for the dividend option, only then you will have dividends. Distributors and AMCs are barred by SEBI from providing any indicative yield rates. Hence, you need to look at the offer document and know where the funds are investing (the debt instruments in which they are investing) and have an idea on the current yields of such instruments. For instance, 1 year CDs yields are around 9% currently and 1 year CPs at 9.6%. thanks.
Hello Vidya,
Is this a good time to invest in FMPs from the indexation benefit angle? With double digit inflation of last few years and CII for 2013-14 at 939 (10.2% increase), are we likely to see a reversal of this trend given a good monsoon? If so, will the indexation benefit be lost?
Tnahks,
Charles
hello Charles, the consumer inflation is still close to double digits and we have just a few months to go to correct this. hence, it may still provide enough benefit although not as high as for 2013-14 over 2012-13. But do keep in mind that yields of 1-year instruments (for 1 year FMPs) are on the decline now after the last 2 MSF rate cuts. Hence you might want to weigh your investment against a short-term debt fund as well, where the capital appreciation scope is better.thanks.
Hello Vidya,
Is this a good time to invest in FMPs from the indexation benefit angle? With double digit inflation of last few years and CII for 2013-14 at 939 (10.2% increase), are we likely to see a reversal of this trend given a good monsoon? If so, will the indexation benefit be lost?
Tnahks,
Charles
hello Charles, the consumer inflation is still close to double digits and we have just a few months to go to correct this. hence, it may still provide enough benefit although not as high as for 2013-14 over 2012-13. But do keep in mind that yields of 1-year instruments (for 1 year FMPs) are on the decline now after the last 2 MSF rate cuts. Hence you might want to weigh your investment against a short-term debt fund as well, where the capital appreciation scope is better.thanks.
Vidya
Could you please explain the taxation part for 1 year FMP,
also suggest what is the best time to in FMP, in-terms of tax and investment [would be grateful even funds are suggested]
regards
Hello Yash, FMPs are taxed the same as debt funds. Tax slab for less than 1 year and 10% without indexation and 20% with indexation for holding more than one year. FMPs can be invested any time provided you choose the right tenure based on itnerest rate cycle. In a rising rate regime, it may not be a good idea to go for long-term FMPs. As for best tax period, to get double indexation benefit, investor often invest closer to March. thanks, Vidya
Vidya
Could you please explain the taxation part for 1 year FMP,
also suggest what is the best time to in FMP, in-terms of tax and investment [would be grateful even funds are suggested]
regards
Hello Yash, FMPs are taxed the same as debt funds. Tax slab for less than 1 year and 10% without indexation and 20% with indexation for holding more than one year. FMPs can be invested any time provided you choose the right tenure based on itnerest rate cycle. In a rising rate regime, it may not be a good idea to go for long-term FMPs. As for best tax period, to get double indexation benefit, investor often invest closer to March. thanks, Vidya
Dear Madam/Sir,
What is the procedure for applying for FMPs online? Pl convey the same on e-mail. Thanks.
Devesh
Investing online in FMPs is very simple and easy at FundsIndia. We’ll have someone reach out to you at the earliest.
thanks
Srikanth
In the current scenario should one invest in FMPs?
Secondly, currently Is there any advantage to invest in FMPs( Dividend Option) of duration between 90 days to 150 days or one should be putting money in Bank FD for this duration?
Are there any FMP’s open for subscription for the period of less than 150 days?
Hello Krishnakumar, When rates are at a peak it makes sense to lick into FMPs if you are a conservative investor and the current scenario appears to fit this. Give that dividends to suffer taxed indirectly (dividend distribution tax reduced from NAV by the fund) there is no significant advg. unless one gets capital gains benefit. Yes, still gains from FMPs may be marginally higher than deposits for hose other than senior citizens and in the high tax bracket. You may keep tab of unds you ask for here: http://www.fundsindia.com/content/jsp/admin/gSpcSchmLst.do?prcsMd=nfo&show=more
Vidya
You say, “Typically, FMPs can be good options in a rising interest rate cycle when compared with open-ended debt funds”, could you elaborate? I thought it is the other way, i.e., locking in a higher interest rate when they are actually falling is a good thing, so aren’t FMP’s good in the current scenario when the interest rates are expected to fall another 75bps over the next few months?
Hello Hari – we are talking in relation to open-ended debt funds. What you say will be true when comparing with products such as FDs. In the current scenario when you lock into FMPs you lock into decent yields (yields have already fallen); however, you will entirely miss out on the ‘price rally’ (capital appreciation) that only open-ended funds can offer. In FMP, you only get the accrual. In open-ended funds, you get the accrual as well as capital appreciation from a favourable price rally (yields fall, NAV rises). Vidya
Could you elaborate on the price rally? Is it the same as the debt fund appreciation that happens when the interest rates go down?
When yields fall, there is a rally in the price of the instrument. This happens because the coupon is fixed…in order to keep the fixed coupon amount with lower yields…the price has to be higher. this is why there is an inverse realtionship between yields and price of debt instruments. Yes, it is the same.
Thanks Vidya! I guess what I am still not clear is, why the price rally won’t be beneficial to the instruments that the FMP’s invest in. I would really appreciate you responding.
🙂 The price rally is beneficial only if you sell the instrument in the secondary market. With FMPs it is by and hold till maturity. That means at the end of the term, what the fund, gets and what you get is only the coupon rate. For you, it is like holding an FD or a debenture and getting the interest at the end (in this case what you get is the coupon of all the underlying instruments that the FMP holds) FMPs cannot sell the instruments in the middle. Their mandate is to hold to maturity so that they get the coupon rate. This is why they are less risky but also have less upside in markets such as the present one.
Thanks again, Vidya! It is really interesting to know that someone could make money selling an instrument early than to wait till its maturity. I don’t however understand why someone would pay for the coupon more than its actual worth 🙂
Well Hari, the devil is in the details 🙂 regards
Hi,
I have been looking for options to invest some bit of my money and came across FMP. I am not really good with the financial jargons and was hoping if you can help me understand the advantage it would have for me over an FD. I was hoping to invest some for my son as he grows up and if FMP will be a good option for me.
Thnx
Hemant
Hello Sir, If you are looking for a long-term inevstment option and want to build reasonable corpus for your child, you should go for a healthy dose of allocation to equity funds. fixed income options such as FD, FMPs cannot build the kind of wealth that equity would. thanks
Vidya
what about ‘absolute return funds’ which are more appropriate to first time equity investors.
Hi Ramanathan,
What do you mean by absolute return funds? Any example…
Regards
Sathya
They are equity oriented funds with 60 -65% hedged and the balance in un- hedged (Long) position. Aims to deliver positive returns but are unlikely to keep up with equities when markets rise sharply. Ideal for first time equity investors who want to enjoy equity returns with low volatility.
Yes, it is a new strategy to avoid the debt taxation and to generate better post tax returns compared to a MIP fund(20% Equity:80% debt). Arbitrage funds on an average delivered around 7-8% annualised return over the last few months. We may get slightly more return than the pure arbitrage funds if the long position generates positive return.It is suitable for first-time investors for equity participation with low capital risk.
Thanks
Sathya
Hello
In the current scenario where FMP’s are taxed at the respective slab levels if held for less than 3 years, is it still a good idea to lock in the amount for 3 yrs (assuming the investor is fine with the lock in) or should we look at income funds instead?
Thanks
Harissh
hello Harish, Since yields have fallen comapred with a year ago, the buy and hold returns on FMPs may be less attractive now. Go for open-ended debt funds. regards, Vidya
nice
nice
There is no better timing than this to lock in your returns given the current high level of yield. http://www.ddramanathan.blogspot.in
How does one to keep tab of new FMP offers of top-rated instruments of various AMC ?
Hello sir, if you are a FundsIndia investor, you willr eceive weekly mails/updates. You can also check them at http://www.fundsindia.com/content/jsp/admin/gSpcSchmLst.do?prcsMd=nfo&show=more
tks
Fundsindia provide very insightful and unbiased advise on markets and investment related products. http://www.ddramanathan.blogspot.in
I have started purchasing FMPs since September, 2013. In this connection, I have some doubts which require clarifications. Kindly clarify the issues mentioned below:-
(a) I have purchased 368 days FMP. I would like to know from which date the counting will start- from the day of my purchase, or, from the date when the FMP gets closed.
(b) After the completion of 368 days, whether the amount will be automatically deposited in my registered Bank Account, or, I have to apply at that time for redemption?
With regards,
Partha Kansabanik
New Delhi
Hello sir,
a. the date of maturity is usually from the date of closing date..in any case every fund will mention the date of maturity.
b. if you have provided your bank details, the amount will automatically be credited to your account, else you will receive a chq. You need not apply for redemption
Thanks
Vidya
Thank you for the clarifications, Madam.
Hi,
I have been looking for options to invest some bit of my money and came across FMP. I am not really good with the financial jargons and was hoping if you can help me understand the advantage it would have for me over an FD. I was hoping to invest some for my son as he grows up and if FMP will be a good option for me.
Thnx
Hemant
Hello Sir, If you are looking for a long-term inevstment option and want to build reasonable corpus for your child, you should go for a healthy dose of allocation to equity funds. fixed income options such as FD, FMPs cannot build the kind of wealth that equity would. thanks
Vidya
Hello
In the current scenario where FMP’s are taxed at the respective slab levels if held for less than 3 years, is it still a good idea to lock in the amount for 3 yrs (assuming the investor is fine with the lock in) or should we look at income funds instead?
Thanks
Harissh
hello Harish, Since yields have fallen comapred with a year ago, the buy and hold returns on FMPs may be less attractive now. Go for open-ended debt funds. regards, Vidya
what about ‘absolute return funds’ which are more appropriate to first time equity investors.
Hi Ramanathan,
What do you mean by absolute return funds? Any example…
Regards
Sathya
They are equity oriented funds with 60 -65% hedged and the balance in un- hedged (Long) position. Aims to deliver positive returns but are unlikely to keep up with equities when markets rise sharply. Ideal for first time equity investors who want to enjoy equity returns with low volatility.
Yes, it is a new strategy to avoid the debt taxation and to generate better post tax returns compared to a MIP fund(20% Equity:80% debt). Arbitrage funds on an average delivered around 7-8% annualised return over the last few months. We may get slightly more return than the pure arbitrage funds if the long position generates positive return.It is suitable for first-time investors for equity participation with low capital risk.
Thanks
Sathya
In the current scenario should one invest in FMPs?
Secondly, currently Is there any advantage to invest in FMPs( Dividend Option) of duration between 90 days to 150 days or one should be putting money in Bank FD for this duration?
Are there any FMP’s open for subscription for the period of less than 150 days?
Hello Krishnakumar, When rates are at a peak it makes sense to lick into FMPs if you are a conservative investor and the current scenario appears to fit this. Give that dividends to suffer taxed indirectly (dividend distribution tax reduced from NAV by the fund) there is no significant advg. unless one gets capital gains benefit. Yes, still gains from FMPs may be marginally higher than deposits for hose other than senior citizens and in the high tax bracket. You may keep tab of unds you ask for here: http://www.fundsindia.com/content/jsp/admin/gSpcSchmLst.do?prcsMd=nfo&show=more
Vidya
You say, “Typically, FMPs can be good options in a rising interest rate cycle when compared with open-ended debt funds”, could you elaborate? I thought it is the other way, i.e., locking in a higher interest rate when they are actually falling is a good thing, so aren’t FMP’s good in the current scenario when the interest rates are expected to fall another 75bps over the next few months?
Hello Hari – we are talking in relation to open-ended debt funds. What you say will be true when comparing with products such as FDs. In the current scenario when you lock into FMPs you lock into decent yields (yields have already fallen); however, you will entirely miss out on the ‘price rally’ (capital appreciation) that only open-ended funds can offer. In FMP, you only get the accrual. In open-ended funds, you get the accrual as well as capital appreciation from a favourable price rally (yields fall, NAV rises). Vidya
Could you elaborate on the price rally? Is it the same as the debt fund appreciation that happens when the interest rates go down?
When yields fall, there is a rally in the price of the instrument. This happens because the coupon is fixed…in order to keep the fixed coupon amount with lower yields…the price has to be higher. this is why there is an inverse realtionship between yields and price of debt instruments. Yes, it is the same.
Thanks Vidya! I guess what I am still not clear is, why the price rally won’t be beneficial to the instruments that the FMP’s invest in. I would really appreciate you responding.
🙂 The price rally is beneficial only if you sell the instrument in the secondary market. With FMPs it is by and hold till maturity. That means at the end of the term, what the fund, gets and what you get is only the coupon rate. For you, it is like holding an FD or a debenture and getting the interest at the end (in this case what you get is the coupon of all the underlying instruments that the FMP holds) FMPs cannot sell the instruments in the middle. Their mandate is to hold to maturity so that they get the coupon rate. This is why they are less risky but also have less upside in markets such as the present one.
Thanks again, Vidya! It is really interesting to know that someone could make money selling an instrument early than to wait till its maturity. I don’t however understand why someone would pay for the coupon more than its actual worth 🙂
Well Hari, the devil is in the details 🙂 regards
Dear Madam/Sir,
What is the procedure for applying for FMPs online? Pl convey the same on e-mail. Thanks.
Devesh
Investing online in FMPs is very simple and easy at FundsIndia. We’ll have someone reach out to you at the earliest.
thanks
Srikanth