There's been a lot of talk on investing cautiously and a lot of investors are looking to bring down the risk percentage in their portfolio. This basically means that low-risk investments seem to be the order of the day. Needless to say, that debt investments like PPF, National saving certificates, FDs, etc sound very much appealing. There is also another investment option, which has been gaining popularity in the last few years – the FMP. FMPs (Fixed Maturity Plans), as the name suggests, come with a fixed maturity period, which ranges anywhere between 3 months or 3 years. FMPs are investment schemes offered by Mutual fund houses. These schemes mainly invest in safe (or low risk) assets. In the current year, Rs 44,000 crore of investor wealth has been spent on FMPs. Clearly, this is a popular investment scheme among investors.
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So why FMPs? The answer is simple really. Fixed Maturity Plans offer assured returns, tax benefits and fixed income. Given the choppy conditions of equity investments, FMPs are a breath of fresh air. Fixed maturity plan, by its very nature is more beneficial to investors in high tax brackets. However, with more and more fund houses launching this product with a minimum investment of Rs 5,000 is making this product a favourite among small investors as well. Fixed maturity plans have been giving FDs a tough competition. Up until a few years back, FDs, NSC, PPF, etc were considered the best option for anyone looking at an investment that offered safe and assured returns. Of course, this was when the interest rates were high, but in the last few years the interest rates in these schemes have dropped throwing the field right open for other investment opportunities. FMPs have seized the spot by offering competitive returns. Plus FMPs have one big advantage over FDs – lower tax incidence. In the case of fixed deposits, the interest earned is added to the investor's income. Which means it is taxable at the rate applicable to the investor's tax bracket. However, with fixed maturity plans, the investor can choose to treat the interest/gain from the FMP as capital appreciation, which has a lower rate of tax (about 10 percent without cost indexation* and 20 percent with it). This is especially beneficial for FMPs with tenure for more than a year. From the tax perspective, FMPs with duration of less than a year can benefit if the investor cashes the gain as dividends. This way the investor is taxed at 12.5% of the returns. All the more reason why this scheme is beneficial for investors in the high tax bracket. Returns from FD for such investors would be taxed at 33 percent (An FMP is very profitable in comparison). Also, FMPs are highly liquid – they can be monthly, quarterly, half yearly as well as annually. With the stocks not offering good returns and most mutual funds offering little or no returns, it's the fixed maturity plan that seems to be offering hope to otherwise disillusioned investors.
*Cost indexation means adjusting the cost of the capital asset by including the impact of inflation during the period of holding that asset.
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