Read in: 3mins, Published On , 28 Jun 2016 By Times Of India
Risk averse investors usually look at debt funds. Other than the open ended debt schemes, there are also some closed ended debts funds that one can explore to invest. Here are some basics on two such funds: Fixed Maturity Plans (FMPs) and Capital Protection Oriented Schemes (CPOS).
WHAT ARE FMPS?
FMPs are close ended m u t u a l funds with a fixed term of investment. Fund managers deploy the fund’s corpus in debt securities like bank certificates of deposits (CDs), commercial papers (CPs), corporate bonds etc. and hold these instruments till their maturity. Usually the mat u r i t y dates of these ins t r u - ments are equal to or less than the FMP maturity date. At the end of the term, the principal plus returns are automatically redeemed and transferred to the investor’s bank account. These instruments are similar to bank FDs. In FMPs the risks are slightly higher, they don’t guarantee any rate of return but the expected returns usually also higher than FDs.
WHO CAN INVEST IN FMPS?
Investors who have some extra funds that they don’t need for some specific period of time, should consider investing in FMPs with similar maturity period. Given the better tax implications, if you are in the higher tax bracket, you should consider investing in FMPs with maturity of more than three years. Investors should be aware that although FMPs are listed, but once you invest in FMPs, it’s difficult to exit before maturity since there is barely any trading in these units.
WHEN TO INVEST IN FMPS? FMPs
Could prove to be better bets when people are not sure if the rate of interest in the economy will go up or down. In these schemes, the fund manager aims to invest in debt securities that have high yields and then stay invested till maturity to give the benefit of high interest inflow. For better returns you should stay invested till the maturity of FMPs.
WHAT ABOUT TAX TREATMENT OF FMPS?
FMPs are more tax efficient than the bank FDs mainly because these funds are debt Mutual Funds which fall under tax rules different from for FDs. Investments in FMPs for more than three years come with indexation benefits. In comparison, FDs do not enjoy such benefits.
WHAT ARE CPOS? CPOS
Are a special category of close ended debt schemes that guarantees that, say if you invest Rs 10,000 in such a scheme, this amount will definitely be returned to you. In addition, they also offer to return some extra money so that your final return is more than the Rs 10,000 you had invested.
HOW DO THEY DO THAT?
Suppose there is a CPOS with a 3-year maturity. The fund manager will invest a large portion of your money, Rs 10,000, in secured debt instruments which will accrue interest for three years and at the end of three years the total corpus_value of debt instruments and the interest accrued in them__will total Rs 10,000. The balance of your Rs 10,000 that was not invested in debt instruments at the beginning, is invested in say equities or other investment products. So at the five year period, you have your Rs 10,000 plus the chance of some extra gain from the other part of the investment. These are the funds where the debt part would give the stability to your money while the equity part would bring in ‘the kicker’, the chance to get something extra.
WHO SHOULD INVEST IN THESE FUNDS?
If you are an investor who is more focused on protecting your hard earned money, rather than willing to take some risks with it, then you should consider these fun
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