FMP (Fixed Maturity Plans) are the biggest category of mutual funds in India, and when this topic was suggested – my first thought was why did it take so long for it to appear here.
FMP: Close Ended Mutual Funds
FMPs are close ended mutual funds and have gained in popularity due to their relatively secure nature and tax advantage when compared with a FD (fixed deposit).
They are close ended so you can only invest in them during the NFO, and redeem them only on maturity.
They are relatively safe but like other mutual funds – their returns are not guaranteed (or even the principal), and unlike a bank fixed deposit where you know how much interest you will earn – you don’t know how much your FMP will return. You can get an idea based on how other funds have performed, but the fund itself doesn’t tell you much you will earn.
FMP Taxation
Fund companies normally issue a lot of FMPs that are slightly over a year – like 368 days, 370 days etc. so that it enjoys the benefit of lower long term capital gain taxation.
Under the current regime – you can even take advantage of double indexation benefit for calculating long term capital gains if a FMP is issued such that it is issued in say March 2011, and redeemed in April 2012: 13 months in all but they are spread over 2 financial years.
I understand that this will be stopped with the DTC (Direct Tax Code), and since we’re already past March – it’s something that you can’t benefit from right now.
However, if you’re in the top tax bracket – FMP taxation still works out better for you when compared with a fixed deposit.
In a FMP you pay long term capital gains gains at either a rate of 10% without indexation or 20% with indexation (whichever is lower) which is better than interest on fixed deposit that’s taxed at your tax bracket which is upwards of 30% if you’re in the top bracket.
Hemant has written a detailed post about FMP vs Fixed Deposits where he’s shown numbers as well, so you can look at his post to see how the calculation works out.
FMP or FDs
It’s the tax advantage that tips the scales in favor of FMP, and people who are in the highest tax bracket can advantage from it. However, there are no free lunches and what you gain in taxes you could end up by way of lower return since a FMP can’t indicate how much return you’re likely to get, and you may end up getting stuck with a lemon.
You could compare past performance and do all that jazz, but there’s still a chance that the one FMP you chose to invest in performed worse than the others – so appreciate that risk while investing in them.
Here are some other differences between FMPs and FDs.
FMP vs FD
FMP NAVs and Asset Composition
Fund companies declare the NAV of their respective FMPs, and you can find these NAVs on their website, and they also declare half yearly results which has a list of the assets they own. This may not make much sense to regular investors though because they are usually names of banks with the CDs they own, and unless you’re very well versed with the bank bond market you can’t really tell one from the other.
Bottomline
In my opinion – people in the lower tax brackets are probably better off sticking with safer instruments like high interest rate fixed deposits, or Post Office Monthly Income Schemes that generate a decent return and offer peace of mind as well, but other folks who stand to gain more can definitely explore this option.
I am a Sr.citizen & normally invest in fd’s for monthly expenses.Since interest rates are going down, I would like to get higher interest for expenses. Is it safe to invest in fmp or MF with dividend pay out quarterly? I want safety & security of investments.
I learnt a lot about FMPs from your blog. Thanks! I had a few questions:
1) If the choice is between Bank FD or FMP, would FMP be still better than bank FD even during low interest rate regime? The assumption is that investment in equity is not an option and liquidity is not expected from this investment.
2) In terms of risk of capital loss, where would you put FMPs investing ~ 50% in securitised debt / asset backed security?
3) Is there a way to find out fund houses who are better at managing FMPs? Or should I just decide my investment duration and then go with what is available in that month?
4)Is the capital capital gain deducted at source for FMPs?
5) Do I get to choose if I want to get capital gains calculated with indexation when I purchase FMP units or that is something I do when I file my returns?
Sir,
You have mentined in your third paragraph that ……”They are relatively safe but like other mutual funds – their returns are not guaranteed (or even the principal),”, which means the returns of mutual funds or some mutual fuds are guaranteed…will you please kind enough to mention a few funds where the returns are guaranteed?…GILT funds????
Karuna.
I am having a hard time finding FMPs with duration of 3 years of more. Does anyone know if FMPs are issued with > 3 years maturity?
Essentially, I am trying to find a mutual fund which will let me lock in the high interest rates right now for, say, 10 years without the tax complexity of FDs.
Vikas, FMPs don’t earn interests but gets capital gain.
So you don’t need to show the accrued interes/gain in the yearly return. But do show the calculation only on the maturity of the same, and pay tax accordingly.
It seems that FMPs will simplify my annual tax return as well – I will have to handle the FMP taxation only in the year it matures as opposed to FDs which have to be handled every year till they mature.
@Ranga – Agree with your point. If ~2.25 % is reduced from the amount that you receive the return would diminish. In such case it doesnt seem to be as lucrative.
@Jitendra – Wouldn’t there be expense of ~2.25 % (may be slightly less) even if securities are held till end of maturity or otherwise?
The benefit of indexation and lower tax on dividend makes FMP an attractive proposition.
As far as expenses are concerned, it gets reduced as the securities are held till maturity and there in no pressure on FM to redeem in between.
When you are investing for above 1 year then indexation benefit reduces your taxability. For lesser time horizon dividend will reduce taxability.Hence, in either case you are yielding higher then FDs if do a comparison .
Dont FMPs trade on stock exchange? Although on practical basis, liquidity on exchange is low. Any idea of yield advantage (in bps) of FMPs over Ultra short term funds? UST funds can be easily redeemed
No, FMPs don’t trade on stock exchange. It is not a bond with specified rate of interest. It is a combination of different papers where yield itself is not disclosed. You can only have an idea by asking the portfolio and find out the prevailing rate of those papers in market.
Ultra short term funds and FMPs are both completely different product. If you want to take advantage of current high rates and also want to avoid the volatility, you should go for FMPs. UST funds are only for parking of short term money. Whenever the interest rates in market starts falling, the yield on UST funds will also starts falling due to portfolio of very short term papers.
If they dont trade on stock exchange, what is this then?
ICICI Prudential Fixed Maturity Plan – Series 64: Being a close-ended fund the Scheme will not reopen for subscription. The Scheme is proposed to be listed on BSE Limited.
I would be more comfortable investing in a ultra short term fund, because of high liquidity. To cover up on the lost interest, one can trade in GILT funds, which will rise with int rate fall (more than compensate due to longer residual duration) and are fully liquid (with no exit load)
I have never bought FMP, just exploring the mechanism. I pasted a link above on ICICI Pru FMP and also Manikaran pasted below on HDFC FMP. Both these 2 links state that FMP will be listed on BSE/NSE and investor can sell these units on exchange to another investor, although trading will be very limited. Thats my precise problem with FMP, they are illiquid. I would consider them more illiquid than even a bond. Only if you are very sure that you dont need the money, it would make sense to invest in FMP. I am better off earning 0.50-1 % lower in UST/Liquid fund and keep 100% liquidity. Ofcourse it would depend upon situational profile of investor.
The top 10 closed FMPs on ValueResearch as of date show an average return of about 10.25% roughly. Given the 10% taxation without indexation, the effective return after tax is 9.22% roughly. Also, it looks like many fund houses like HDFC, DSP etc. that issue FMPs also charge an expense ratio of 2.25%. Simplistically calculated, this would cut down on the total return and give an effective rate of 6.97%.
Am I missing something in the calculation above? If not, even for a high tax bracket individual, isnt the effective rate of return after taxes much more comparable to FDs after taxes (assuming 9.5% this would be about 6.67%)?
After reading up more, it seems like almost all funds specify an estimated expense of 2.25% (the maximum a debt fund can be) but in practice the funds’ expense ratios vary. For instance, even within DSP’s FMPs & FTPs, in latest published stats (http://www.dspblackrock.com/PDFs/Scheme%20Expense%20Ratios/Current_Expense_Ratio_2022012.pdf), the ratios dont seem to go beyond 1%. Which does make FMPs a good proposition even including expenses. Thanks.
That’s a good question, I’m afraid I don’t know of a website that does this, but I agree it’s a useful thing to have. I’ll see if it is practical for me to create a page like that. Let’s see.
I’ll have to look at the particular fund to say if it is or isn’t Sandeep. I’ve not looked at them closely enough to answer you right away. Is any release coming out that you’re interested in?
CPO funds are designed in such a way so as to give capital protection to investors by keeping maximum amount in debt and the balance in equity. The Return on investment is dependent on the performance of equity only.
Say for e.g 3 years CPs in market are yielding 9% , so in 3 years CPO 77% corpus will be invested in debt, which will becom Rs 100 on maturity and remaining 23% in equity which will help in generating returns. If equity market performs then you will gain otherwise you will get your capital back.
These products are similar to FMPs only in terms of taxation as these are treated as debt funds only but in terms of features these are different in nature.
Hi Manshu,
You may also wish to add on the Growth (Cumulative) Vs Dividend Option in FMPs. What i have understood is that if the tenure of the FMP is more than one year, it might be better to go for the Growth Option and if less than a year, dividend option might be appropriate. Do let me know what you feel about it.
Hi Vijay – that’s a good point. Since the DDT is lower than short term capital gains it makes more sense to go for a dividend option in the less than 1 year time – frame.
Whether you should opt for a FMP in such a time frame or not is another question in itself, and I think that will make a good topic for a future post.
Hi,
I want to know, is it good to invest in Axis Fixed Term Plan Series 92 (154 Days) – Direct Plan (dividend or growth) considering i’m in 20% tax slab.
https://economictimes.indiatimes.com/axis-fixed-term-plan-series-92-(154-days)–direct-plan/mfinvestment/schemeid-35994.cms
How much will be the expected returns (approx) after maturity ie 154days if i invest Rs.10K ?
I am a Sr.citizen & normally invest in fd’s for monthly expenses.Since interest rates are going down, I would like to get higher interest for expenses. Is it safe to invest in fmp or MF with dividend pay out quarterly? I want safety & security of investments.
hello
i want to know whether the maturity amount of post office is taxable or not can anyone give me a clear answer
You didnt say which scheme. Traditional ones like POMIS / RD are taxable based on your tax bracket.
Hi Manshu –
I learnt a lot about FMPs from your blog. Thanks! I had a few questions:
1) If the choice is between Bank FD or FMP, would FMP be still better than bank FD even during low interest rate regime? The assumption is that investment in equity is not an option and liquidity is not expected from this investment.
2) In terms of risk of capital loss, where would you put FMPs investing ~ 50% in securitised debt / asset backed security?
3) Is there a way to find out fund houses who are better at managing FMPs? Or should I just decide my investment duration and then go with what is available in that month?
4)Is the capital capital gain deducted at source for FMPs?
5) Do I get to choose if I want to get capital gains calculated with indexation when I purchase FMP units or that is something I do when I file my returns?
Thanks!
Aakash
Sir,
You have mentined in your third paragraph that ……”They are relatively safe but like other mutual funds – their returns are not guaranteed (or even the principal),”, which means the returns of mutual funds or some mutual fuds are guaranteed…will you please kind enough to mention a few funds where the returns are guaranteed?…GILT funds????
Karuna.
I am having a hard time finding FMPs with duration of 3 years of more. Does anyone know if FMPs are issued with > 3 years maturity?
Essentially, I am trying to find a mutual fund which will let me lock in the high interest rates right now for, say, 10 years without the tax complexity of FDs.
VikasG…chk this new FMP launched today
http://hdfcfund.com/Products/SchemeDetails.aspx?SchemeID=ac6249bd-d434-431f-89e5-69f0dace2095
Thanks Manikaran. This particular FMP is of 3 years and 1 month duration. Do you know of any other FMPs with 5-15 year duration?
Hi Manshu,
I bought an 2 year FMP (growth option) in Dec 2011. It matures in Dec 2013.
Since I have chosen growth option, no dividends will be declared by the AMC.
Like FDs, do I have to report the accrued interest in this FMP in my yearly tax return or would I handle the total interest after the FMP matures?
Thanks again.
-Vikas
Vikas, FMPs don’t earn interests but gets capital gain.
So you don’t need to show the accrued interes/gain in the yearly return. But do show the calculation only on the maturity of the same, and pay tax accordingly.
Thanks Manikaran,
It seems that FMPs will simplify my annual tax return as well – I will have to handle the FMP taxation only in the year it matures as opposed to FDs which have to be handled every year till they mature.
@Ranga – Agree with your point. If ~2.25 % is reduced from the amount that you receive the return would diminish. In such case it doesnt seem to be as lucrative.
@Jitendra – Wouldn’t there be expense of ~2.25 % (may be slightly less) even if securities are held till end of maturity or otherwise?
Ranga,
The benefit of indexation and lower tax on dividend makes FMP an attractive proposition.
As far as expenses are concerned, it gets reduced as the securities are held till maturity and there in no pressure on FM to redeem in between.
When you are investing for above 1 year then indexation benefit reduces your taxability. For lesser time horizon dividend will reduce taxability.Hence, in either case you are yielding higher then FDs if do a comparison .
Are FMPs totally illiquid? What if i wish to redeem before maturity?
u can’t withdraw it before maturity.
Dont FMPs trade on stock exchange? Although on practical basis, liquidity on exchange is low. Any idea of yield advantage (in bps) of FMPs over Ultra short term funds? UST funds can be easily redeemed
No, FMPs don’t trade on stock exchange. It is not a bond with specified rate of interest. It is a combination of different papers where yield itself is not disclosed. You can only have an idea by asking the portfolio and find out the prevailing rate of those papers in market.
Ultra short term funds and FMPs are both completely different product. If you want to take advantage of current high rates and also want to avoid the volatility, you should go for FMPs. UST funds are only for parking of short term money. Whenever the interest rates in market starts falling, the yield on UST funds will also starts falling due to portfolio of very short term papers.
If they dont trade on stock exchange, what is this then?
ICICI Prudential Fixed Maturity Plan – Series 64: Being a close-ended fund the Scheme will not reopen for subscription. The Scheme is proposed to be listed on BSE Limited.
http://www.icicipruamc.com/download/NFO/SID-FMP64-274DaysPlanF.pdf
I would be more comfortable investing in a ultra short term fund, because of high liquidity. To cover up on the lost interest, one can trade in GILT funds, which will rise with int rate fall (more than compensate due to longer residual duration) and are fully liquid (with no exit load)
Could you give a couple of fund names that you are familiar with for doing this Ankur? I’d like to read up their details. Thanks.
I can’t see an option to buy any FMP through ICICI Direct. Have you ever done this Ankur? If so, could you tell me where to look for this? Thanks.
I have never bought FMP, just exploring the mechanism. I pasted a link above on ICICI Pru FMP and also Manikaran pasted below on HDFC FMP. Both these 2 links state that FMP will be listed on BSE/NSE and investor can sell these units on exchange to another investor, although trading will be very limited. Thats my precise problem with FMP, they are illiquid. I would consider them more illiquid than even a bond. Only if you are very sure that you dont need the money, it would make sense to invest in FMP. I am better off earning 0.50-1 % lower in UST/Liquid fund and keep 100% liquidity. Ofcourse it would depend upon situational profile of investor.
The top 10 closed FMPs on ValueResearch as of date show an average return of about 10.25% roughly. Given the 10% taxation without indexation, the effective return after tax is 9.22% roughly. Also, it looks like many fund houses like HDFC, DSP etc. that issue FMPs also charge an expense ratio of 2.25%. Simplistically calculated, this would cut down on the total return and give an effective rate of 6.97%.
Am I missing something in the calculation above? If not, even for a high tax bracket individual, isnt the effective rate of return after taxes much more comparable to FDs after taxes (assuming 9.5% this would be about 6.67%)?
After reading up more, it seems like almost all funds specify an estimated expense of 2.25% (the maximum a debt fund can be) but in practice the funds’ expense ratios vary. For instance, even within DSP’s FMPs & FTPs, in latest published stats (http://www.dspblackrock.com/PDFs/Scheme%20Expense%20Ratios/Current_Expense_Ratio_2022012.pdf), the ratios dont seem to go beyond 1%. Which does make FMPs a good proposition even including expenses. Thanks.
I am struggling to find one place to see all open FMPs. Can anyone suggest a website which lists all open FMPs.
That’s a good question, I’m afraid I don’t know of a website that does this, but I agree it’s a useful thing to have. I’ll see if it is practical for me to create a page like that. Let’s see.
Vikas…chk this out
http://www.moneycontrol.com/mutual-funds/new-fund-offers
if there is cumulative FMP if Yes then tell me in details as soon as possible plzzzzzzz
Thanks
Hi Manshu,
Is a Capital Protection Oriented Fund comparable with an FMP?
Regards,
Sandeep
I’ll have to look at the particular fund to say if it is or isn’t Sandeep. I’ve not looked at them closely enough to answer you right away. Is any release coming out that you’re interested in?
CPO funds are designed in such a way so as to give capital protection to investors by keeping maximum amount in debt and the balance in equity. The Return on investment is dependent on the performance of equity only.
Say for e.g 3 years CPs in market are yielding 9% , so in 3 years CPO 77% corpus will be invested in debt, which will becom Rs 100 on maturity and remaining 23% in equity which will help in generating returns. If equity market performs then you will gain otherwise you will get your capital back.
These products are similar to FMPs only in terms of taxation as these are treated as debt funds only but in terms of features these are different in nature.
Thanks Manikaran, doesn’t sound too exciting to me…any example of such a product that comes to your mind? Thanks.
Hi,
Where can we find the indexation value? Is there any GOI website from where we can get that value?
Thanks
Here is a link to see the old index values:
http://taxguru.in/income-tax/cost-inflation-index-meaning-and-index-for-all-the-years.html
Hi Manshu,
You may also wish to add on the Growth (Cumulative) Vs Dividend Option in FMPs. What i have understood is that if the tenure of the FMP is more than one year, it might be better to go for the Growth Option and if less than a year, dividend option might be appropriate. Do let me know what you feel about it.
Hi Vijay – that’s a good point. Since the DDT is lower than short term capital gains it makes more sense to go for a dividend option in the less than 1 year time – frame.
Whether you should opt for a FMP in such a time frame or not is another question in itself, and I think that will make a good topic for a future post.
True!!! Thanks!