FMPs: What’s all this fuss about?Author: Dr. Renu Pothen, Research Manager, Fundsupermart.com IndiaThis article was published in Moneycontrol.com on Tuesday, 05 July 2011RBI increases Repo and Reverse Repo rates by 50 bps! The headline on Television and Printmedia after the monetary policy meet of the Central Bank is a cause of concern not only for thestock markets or corporate India but also for a person on the street who is indirectly linked tothe financial markets. This is as a result of the realization that a rate hike would in turn,translate to higher EMIs as loans taken for property/vehicles, etc. would become costlier afterthe tightening of monetary policy. However, there is one section of Aam Janta who is happywith this decision as banks are vying with each other to divert surplus household/corporatesavings by offering the highest deposit rates.Along with banks the financial space also has mutual funds competing for the surplus money ofthe retail investors and corporate. The mutual funds advocate the money to be moved into adebt product, namely Fixed Maturity Plans (FMPs); which is being considered as a substitute forFixed Deposits (FDs). FMPs which underwent a bad phase in 2008, once again gained hype inthe mutual fund industry in 2010. This was on the back of the huge liquidity crisis faced in theeconomy and the tight monetary policy carried by RBI to tame inflationary pressures. This canbe seen from the number of FMPs launched in 2010 (340) and 2011 YTD (410) as against 90 in2009.FMPs are close-ended debt funds which invest into short-term papers like Certificate ofDeposits (CDs), Commercial Papers, etc.The instruments in the portfolio are held till maturity asa result of which interest rate risk is negligible. All FMPs have to be listed on a Stock Exchangeso as to allow premature withdrawal for investors. In a rising interest rate scenario, FMPs areusually recommended to investors in the highest tax bracket. This is because, FMPs areconsidered to be more tax efficient and yield better post-tax returns. As far as taxation isconcerned, if an investor holds an FMP, whose time horizon is more than a year then he wouldbe taxed 10% without indexation and 20% with indexation. In the case of Short-Term FMPs(that is less than a year), the investors can look at Dividend option where the dividenddistribution tax is at ~ 13.52%. This is against FDs, wherein, the investor is taxed as per theincome tax slab. For instance, if an FD and FMP yield a rate of return of 8% for a period of 1year, then the post-tax return would be 5.36% and 7.20%, respectively. FMPs are a substitutefor FDs; however the latter have been considered as a safer investment option by our parentsand grandparents due to the safety and assured returns that came with them. However, in the
case of FMPs, neither the returns nor the portfolio is known to the investor and this makes itdifficult for them to authenticate it.AMCs and experts are pushing FMPs among investors, however we advise investors to keep thefollowing points in mind before purchasing the product.FMPs work well when the macro-economic scenario is unfavourable, i.e. when interest ratesare on an upward trajectory due to inflationary concerns and the liquidity in the system isnegative. In the case of an improvement in the scenario FMPs should not be preferred by theinvestors.From, the time SEBI prohibited the fund houses from declaring indicative yields and portfolios,the investors have no information except than the name and the tenure of the product. In thiscase, we advise the investors to look at the portfolios of the FMPs that have already beenlaunched. This would give them an idea of the instruments into which the investor money hasbeen allocated. The investors should also look at the pedigree of the fund house and theirstrategy in managing short-term funds.Although, SEBI has made it compulsory for fund houses to list the FMPs so that investors whowant to go for premature withdrawal can do so. However, we believe that this option is not asliquid as it is considered to be; as a premature exit from an FMP would also prevent theinvestor to take advantage of the rising interest rate scenario. Hence, only those investors whodo not require money for a stipulated time period should go for this product.To conclude, investors with a time horizon of 1-2 years and who fall in the highest tax bracketcan park their surplus money in FMPs. Powered by Launched in 2000, Fundsupermart.com is one of the largest online distributors of mutual funds in South East Asia, with regional presence in Singapore, Hong Kong, Malaysia, and now, India. www.fundsupermart.co.in is the online mutual fund information and transaction site for self-directed investors and is part of iFAST Financial India Private Limited. It is a single point destination for investing in Mutual Funds with Free account opening, Easy transacting, Zero transaction and maintenance fees, Research articles, Recommended Funds & Portfolios, Fund Manager Interviews, FSM School carrying basic articles/videos for novice investors and more!
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