FMPs (Fixed Maturity Plans)
FMPs are good options for investors wanting to block their money for a fixed time frame. Though the returns are not assured, investors can expect a return in tune with the current interest rate scenario.
These close-ended schemes (meaning that one can only enter them when they are launched and exit them when their pre-stated term is over) seek to generate regular returns and capital appreciation by investing in debt, government and money market securities normally maturing in line with the duration of the scheme.
More than 60% of the FMP applications are for a period of 13 months. The logic behind going for 13-month FMP is that such plans also get the benefit of double indexation (explained later).
Risk Involved:
However, before rushing in to invest in FMPs, one should remember that they are little bit riskier compared to Fixed Deposits (FDs) as they also invest in bonds and debentures of companies. And, if the company invested in defaults, the FMP would be in a tight spot to deliver the indicative returns. Where as FDs invest in risk-free assets like government bonds.
Benefits:
An investor selling fixed income securities (like FDs) older than one year is liable to pay long-term capital gains tax on it. But, the actual gain is much less than what is likely to appear on selling the securities because of inflation during the said period.
But we all know that long term FMPs give indexation benefit to the investors. Meaning of Indexation is that the actual gain to the investor is the gain after deducting his cost plus inflation during that period. This process of setting off the inflation rate is called indexation which FMPs enjoy compared to bank FDs.
Gains of Double Indexation
If you are planning a debt fund investment early in the next financial year, it will be worthwhile to advance it a bit and do so before the end of the year. Here is how it will be more tax efficient.
Debt funds are taxed at the lower rate of 10 % of the capital gains without indexation or 20 % with indexation. Indexation is essentially an inflation adjustment made on long - term (i.e. more than one year) capital gains earned by you. If you invest before the end of financial year, you will be able to avail the indexation benefit of one additional year.
The table illustrates how an investor can avail the indexation benefit for two years instead of one (popularly called the 'double indexation' benefit) by investing just before March 31. This leads to an increase in the deemed cost of investment (the indexed cost of acquisition) for taxation purposes, and hence a reduction in tax liability. While the illustration assumes an investment made in 2005, it will work in a similar way for any financial year.
Although this is applicable for all debt funds, it is particularly popular with FMP investors. They typically invest in FMPs of a little over one year duration just before the end of the financial year and pay lesser tax on the gains.
Investment
| |||||||
Before March 31, 05
|
After March 31, 05
| ||||||
i
|
Amount Invested
|
100,000
|
100,000
| ||||
ii
|
Gains (assuming 9% return)
|
9,000
|
9,000
| ||||
iii
|
Redemption Value (i+ii)
|
109,000
|
109,000
| ||||
iv
|
Indexed cost of acquisition*
|
108,125
|
104,427
| ||||
v
|
Taxable Gains (iii-iv)
|
875
|
4,573
| ||||
vi
|
Capital Gains Tax
|
175
|
915
| ||||
Illustration:
Let us look at the following illustration which compares the FMPs (both with indexation and without indexation) viz-a-viz ordinary Bank FDs (Fixed Deposits).
Bank FD
|
FMP Fund
| ||
With Indexation
|
Without Indexation
| ||
Amount Invested (Rs.)
|
10,000
|
10,000
|
10,000
|
Tenure (Months)
|
19
|
19
|
19
|
Illustrative Return*
|
11.00%
|
11.00%
|
11.00%
|
Maturity Value
|
11,797
|
11,797
|
11,797
|
Income/Capital Gains on Value
|
1,797
|
1,797
|
1,797
|
Indexation Factor^
|
NA
|
1.115
|
NA
|
Indexed Cost
|
NA
|
11,150
|
NA
|
Capital Gain (adjusted for indexation)
|
NA
|
647
|
NA
|
Tax Rate Applicable#
|
33.99%
|
22.66%
|
11.33%
|
Tax Liability
|
611
|
147
|
204
|
Net Gain (Rs.)
|
1,186
|
1,650
|
1,593
|
Post Tax Returns
|
7.34%
|
10.13%
|
9.79%
|
Where will you get FMPs?
FMPs are available with all major mutual fund houses, like HDFC Mutual Fund, Reliance Mutual Fund, UTI Mutual Fund, Franklin Templeton Mutual Funds, SBI Mutual Funds, etc. The name of the fund is of the sort, fixed maturity plan – series XYZ (since they are close ended funds) or fixed horizon maturity funds – series XYZ.
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