What is FMP - (Fixed Maturity Plans) and their Benefits

Adding equity to your retirement kitty​Attainment of financial goals requires perseverance. It does not happen overnight. The changing macros, such as inflation, can become spokes in the investment wheel. To keep that wheel running smoothly, one has to widen one’s investment diaspora beyond traditional savings like bank fixed deposits (FDs) etc. Investors should look at debt funds such as fixed maturity plans (FMPs).

What are FMPs? ​

FMPs are closed-ended schemes with a pre-defined maturity, which invest in various debt instruments based on the investment objective and asset allocation of the Scheme such as debt instruments ,certificates of deposit (CDs) and commercial papers (CPs). Normally available tenures are 90, 180 and 370 days; and three years or like . FMPs’ one of the most attractive point is that they invest in a portfolio of debt securities whose maturity or tenure matches that of the scheme. If the FMP is for 12 months, the fund manager will invest in instruments with a maturity of on or before 12 months, which helps to locking the yield of the portfolio and lowering the interest rate risk. In case interest rates are high at the time of the FMP's launch, the invested portfolio would reflect high yields and, thus, be value accretive. For liquidity purposes, FMPs are listed on stock exchanges where you can buy / sell your units. 

Long tenure FMPs are still a good investment option

Though FMPs for less than three years have lost sheen since the tax changes announced in the July 2014 Union Budget, those with a horizon of over three years are still attractive. Prior to the tax changes, FMPs scored over FDs due to lower tax rates and indexation benefits. Indexation helps in saving tax on capital gains as it allows investors to adjust for the effect of inflation on the gains made. However, the July 2014 Union Budget increased the long-term capital gains tax on debt-oriented mutual funds from 10% to 20% with indexation, and the definition of 'long term' for debt mutual funds was revised to 36 months from 12 months.​ This revision affected FMPs with less-than-three-years tenure. Assuming individual falls in the highest tax bracket of 30%, short-term capital gains tax for FMPs less than three years is now 30% % ( plus applicable surcharge and cess), while long-term capital gains tax for FMPs greater than three years is 20 % (plus surcharge and cess). FDs, on the other hand, are taxed as per the tax bracket 

Table 1: Tax treatment of debt funds and FDs

^ Assuming the investor falls in the highest tax bracket 
FMPs with a three-year horizon are still attractive based on indexation benefits wherein tax will be significantly lower than what is payable on FD interest (Table 2). 

Table 2: Benefit of FMPs over FDs

Assuming annualised returns of 8%, inflation of 7% and tax brackets excluding cess 
As the tables indicate, outflow across the tax brackets is lower than the flow from investments in FDs. The biggest benefit is for investors in the highest tax bracket. In addition, the higher interest rate scenario works well for FMPs as they can lock into the high yields for the investment period and enable investors to reap high returns. 

Before investing in FMPs, pay attention to a few aspects​

Benefits of FMPs notwithstanding, there are some discouraging factors. 1) They do not offer guaranteed returns like FDs 2) FMPs carry credit risk (possibility of default of securities in their portfolio) and hence, investors should monitor FMP portfolios that are available on the websites of mutual funds for their credit rating. 3) FMPs have low liquidity despite the listing as trading volumes are extremely low while FDs are relatively more liquid as premature redemption is allowed, albeit at a cost (penalty charges). Investors need to check the liquidity and risks and opt for FMPs only if they do not need premature redemption and benefit from high post-tax yields. Before investing, you can refer to Scheme Information of the Scheme for details on the risk factors, investment objective, asset allocation & investment strategy to understand about the product. 
Any information contained in this article is only for informational purpose and does not constitute advice or offer to sell/purchase units of the schemes of SBI Mutual Fund. Information and content herein has been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. Liquid Schemes are open-ended schemes that invest in debt and money market securities.​

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