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Look at fixed maturity plans for stable return
Published On , 29 Apr 2018 By TOI
With volatility in FDs rates, investors looking for fixed returns could look at these mutual fund schemes
Indians, for long, have considered bank fixed deposits to be one of the safest avenues to put their savings in for an assured return. Although it’s well known that returns from FDs just about meet the rate of inflation which was there at the time of starting an FD, a large number of Indian savers have mostly didn’t look much beyond this popular investment product. Banks in the country, with some help from the government occasionally, have also met such expectations successfully.
One of the reasons for the popularity of FDs is the absence of any competing product for Indian investors. Also, earlier banks were able to more or less maintain a stable rate of interest for FDs.
The scenario has changed over the past few years. For one, the volatility in the market__mainly in the Debt segment__has forced banks to change their FD rates frequently. This has also led FD investors to think about their return when they reinvest their money in FDs, also called rolling over of FDs after maturity. Secondly, fixed maturity plans (FMPs) by mutual funds have also emerged to be one of the best competitors for bank FDs when it comes to the issue to getting attention of investors who prefer to park their money for a certain period of time to get assured return.
As the name suggest, FMPs are mutual fund schemes with a pre-fixed investment duration, and work almost like bank FDs. Although while launching an FMP fund houses are not allowed to guarantee any rate of return at the end of the term, some basic research and enquiry in the market can give investors information about the rate of return he/she could expect at the end of the term.
There are FMPs which come with durations of three years or more, which help investors neutralise the impact of inflation on their returns. This is done through a process called indexation. So if an investor invests in FMPs and he/she has to pay income tax at the time of redemption, postindexation, the effective rate of tax could be down to less than 5%. This is one of the advantages of FMPs of threeyear duration or more compared to FDs. Returns from FDs do not enjoy any indexation benefits.
Investors in FMPs could enjoy another benefit, also linked to indexation, if they time their investments well. If an investor invests in an FMP almost near the close of a financial year, and the redemption takes place after the start of the fourth financial year, the investor can enjoy four indexation benefits, fund industry professionals said. For example if an investor had invested in an FMP in February or March this year and it was set to mature in April 2021, he/she could avail of four indexation benefits although the actual investment was for a little over three years.
Since FMPs do not churn their portfolio much, they come with a low cost to investors. According to Sebi rules, FMPs are now not allowed to invest in Debt instruments which have longer residual maturity than the maturity of the FMP that invests in those Debt papers. This rule, to a large extent, insulates FMPs from volatility and risks that could emerge from market gyrations.
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